SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 2002.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 000-21953
ENVIRONMENTAL SAFEGUARDS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 87-0429198
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
2600 SOUTH LOOP WEST,
SUITE 645,
HOUSTON, TEXAS 77054
(Address of principal executive offices, including zip code)
(713) 641-3838
(Registrant's telephone number, including area code)
Securities registered under Section 12(b) of the Exchange Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- -------------------
Common Stock, $.001 par value OTC Bulletin Board
Securities registered pursuant to 12(g) of the Exchange Act: NONE
Indicate by check mark whether the registrant (i) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (ii) has been subject to such filing requirements for the
past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
TABLE OF CONTENTS
PAGE
PART I
Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . 6
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters 8
Item 6. Selected Financial Data. . . . . . . . . . . . . . . . . . . . . . 9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations. . . . . . . . . . . . . . . . . . . . . 9
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . 17
Item 8. Financial Statements and Supplementary Data. . . . . . . . . . . . 17
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . 17
PART III
Item 10. Directors and Executive Officers of the Registrant . . . . . . . . 19
Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . 19
Item 12. Security Ownership of Certain Beneficial Owners and
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 13. Certain Relationships and Related Transactions . . . . . . . . . . 19
Item 14. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . 19
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K . 20
PART I
ITEM 1. BUSINESS
INTRODUCTION
Environmental Safeguards, Inc. is engaged in the development, production
and sale of environmental remediation and recycling technologies and services to
oil and gas industry participants, waste management companies and other
industrial customers, through its wholly-owned subsidiaries National Fuel &
Energy, Inc. ("NFE") and OnSite Technology, L.L.C. ("OnSite").
During the period 1996 - 2000 a substantial portion of our revenues were
generated from major international oil and gas industry participants in Latin
America (Columbia, Venezuela and Mexico) as well as from other domestic and
foreign industrial applications. As of April, 2003 we have completed our foreign
contract operations, and have taken steps to close down certain of our foreign
subsidiaries. We are now concentrating our marketing efforts and resources on
domestic downstream plants, manufacturing facilities and waste management
facilities, where our proprietary equipment and process have a competitive
advantage in waste minimization, and recycling/reuse of waste streams.
As of April 2003, OnSite operates internationally through its wholly-owned
subsidiary OST Equipment Leasing L.L.C, and its 50%-owned subsidiary, OnSite
Arabia, Inc. OnSite is in the process of closing down (liquidating) the OnSite
Colombia, Inc. and OnSite Mexico, L.L.C. subsidiaries. Onsite has completely
closed down its OnSite Venezuela, Inc. and OnSite Environmental UK Ltd.
subsidiaries.
The environmental remediation and recycling services that we provide
involve the removal of hydrocarbon contaminants from solids using indirect
thermal desorption remediation and recycling technology. We provide these
services on-site or at the central location to which the customer hauls the
contaminated materials.
HISTORY
We were incorporated under the laws of the State of Nevada in December
1985, under the name of Cape Cod Investment Company. In December 1986, our name
was changed to Cape Cod Ventures, Inc. In August 1987, an initial public
offering was completed for 4,148,000 shares of Common Stock at a price of $0.001
per share pursuant to the exemption from the registration requirements of the
Securities Act of 1933 provided by Regulation A. In May 1993, an Agreement and
Plan of Reorganization was executed with National Fuel & Energy, Inc., a Wyoming
corporation, providing for the acquisition of NFE in exchange for shares of our
Common Stock. In connection with the reorganization, our name was changed to
Environmental Safeguards, Inc., and NFE became our wholly-owned subsidiary.
In January 1995, we entered into an agreement with Parker Drilling Company
("Parker"), a Delaware corporation, granting Parker exclusive marketing rights
to our proprietary processes for on-site remediation and recycling services in
connection with drill cuttings at oil and gas drilling sites throughout the
United States and in certain foreign countries. In August 1995, we expanded our
agreement with Parker by forming OnSite, a joint company between NFE and Parker,
in which NFE and Parker each owned 50%. In December 1997, we entered into a
Purchase Agreement (the "Purchase Agreement") with Parker which provided for our
acquisition, through NFE, of Parker's 50% equity interest in OnSite resulting in
NFE becoming the owner of 100% of the equity interest in OnSite. Pursuant to the
terms of the Purchase Agreement, we paid $8,000,000 for the 50% equity interest
and repaid a $3,000,000 loan that had been made to us by an affiliate of Parker.
As part of the transaction, Parker returned to us unexercised warrants to
purchase 300,000 shares of our Common Stock.
Our sources of funds to effect the acquisition included the sale of
$8,000,000 of new Series B Convertible Preferred Stock and Series C Preferred
Stock to an investor group consisting of Cahill, Warnock Strategic Partners
Fund, L.P., Strategic Associates, L.P., Newpark Resources, Inc. and James H.
Stone, who is the Chairman of Stone Energy Corporation and a secured loan of
$6,000,000 from the same investor group ("Loan Agreement"). Pursuant to the
financing, David L. Warnock, a member of Cahill, Warnock & Co., L.L.C. and
general partner of Cahill, Warnock Strategic Partners Fund, L.P., was appointed
as one of our Directors.
1
BUSINESS ACTIVITIES
General: Substantially all of our activities are conducted through OnSite,
which is engaged in the development and production of remediation and recycling
technology and the sale of environmental remediation and recycling services.
OnSite owns the technologies included in its Indirect Thermal Desorption ("ITD")
units, and the proprietary processes for on-site remediation and recycling of
hydrocarbon contaminated solids. To date, the environmental remediation and
recycling services we have provided have involved the removal of petroleum
contaminants from waste streams using our ITD units. Our ITD units are easily
transported processing systems which produce clean solids from contaminated
solids while reclaiming the hydrocarbons. Our customers consist primarily of
large corporations with hydrocarbon or hydrocarbon derivative contaminated waste
streams and waste management companies in the business of offering waste
disposal services.
The primary services we offer involve the remediation and recycling of
waste streams contaminated by oil-based drilling fluids, fuel spills, leakage at
storage tanks, refinery wastes, ship sludges and other sources of hydrocarbon
contamination, as well as the remediation of industrial waste. To remediate and
recycle the contaminated solids, we utilize our ITD units consisting of (i) an
indirect thermal desorption unit wherein the hydrocarbon contaminated materials
are indirectly heated, thereby causing the hydrocarbon contamination to
vaporize; and (ii) a condensation process system, which causes the hydrocarbon
vapor to condense to a liquid, or an afterburner or thermal oxidizer, which
incinerates the hydrocarbon vapor resulting in a safe and clean process. Our ITD
units are mobile, and thus, contaminated solids can be remediated and recycled
at the site where the contaminated waste streams are located. We do not haul or
dispose of solids or contaminants away from the customer's location.
As of April 2003, we owned five ITD units outright, and had a 50% interest
in two additional units owned by our 50%-owned subsidiary OnSite Arabia, Inc.
Customers: Our targeted customers are companies that have industrial
activities or sites that produce or process quantities of hydrocarbon
contaminated waste. Through OnSite, we typically submit a bid for a project
based on the costs of moving the equipment to the location, the estimated
charges for labor and fuel, the nature and extent of the contamination, the type
and moisture content of the soil and the estimated processing time. Once a
contract has been awarded, equipment is moved to the client's desired location.
Indirect Thermal Remediation and Recycling: The primary services we offer
involve: (i) the remediation and recycling of hydrocarbon contaminated
industrial waste streams, (ii) the remediation and recycling of hydrocarbon
contamination at settling ponds, oil and gas exploration sites, refineries,
petrochemical facilities, abandoned production fields, Department of Defense
installations, ships and dock facilities and other similar sites; (iii) the
remediation and recycling of soil contaminated by oil-based drilling mud, fuel
spills, leakage at storage tanks, leakage from pipelines; and (iv) the
remediation and recycling of valuable drilling fluids which have been captured
in soil and drilling muds during the drilling process. To date we have employed
our ITD units to provide remediation and recycling services to oil and gas
industry refining and drilling operations, tank farms and compressor sites,
industrial waste disposal facilities and oilfield waste disposal facilities.
This process is known as "indirect thermal desorption" because it reverses the
contamination process and removes the hydrocarbons from the solids and
discharges the contaminants previously absorbed without direct contact of the
solid to a flame.
Our ITD units, which are portable equipment, utilize a rotating,
heat-jacketed trundle to vaporize hydrocarbons from contaminated soil or other
contaminated materials. Our ITD units consist of two principal components: (i)
an indirect thermal desorption unit wherein the hydrocarbon contaminated solid
is indirectly heated, thereby causing the hydrocarbon contamination to vaporize;
and (ii) a condensation process system, which causes the hydrocarbon vapor to
condense to a liquid for recycling. As an alternative to the condensing system,
the vapor can be passed through an afterburner or thermal oxidizer, which
incinerates the hydrocarbon vapors.
2
The heat exchange system is comprised of a large fabricated steel shell
which houses a rotating trundle. Hot gases pass through the shell and around the
outside surface of the trundle. Hydrocarbon contaminated materials, are loaded
into the elevated end of the trundle by a conveyor belt or a front-end loader.
As the trundle revolves, the contaminated materials are agitated by internal
lifts and oars as they passes through the inside of the trundle by gravity flow
and are heated to temperatures from 200 to 1,000 degrees Fahrenheit. At these
temperatures, the hydrocarbon contaminants in the solids transform into vapors,
which are vacuumed out of the heat exchange system into the condensing system,
the afterburner or the thermal oxidizer. The clean materials then drop out of
the discharge door at the low end of the trundle and are passed through an
enclosed conveyor for re-hydration before final discharge. Random samples are
tested at the end of the process to confirm that the contaminants have been
removed.
The hydrocarbon vapors removed from the heat exchange system by vacuum are
passed through a fan-cooled condensing system. The vapors are condensed into
liquids and collected in storage tanks and can then be recycled or disposed,
depending on the nature of the contaminant, the needs of the customer and the
specifications required for reuse. To date, our ITD units have demonstrated
their ability to process up to 192 tons of contaminated soil in a 24-hour period
with 30% hydrocarbon saturation. However, the processing capacity varies
significantly depending on the moisture content, degree of contamination, soil
type, contamination type and the remediation and recycling required. There can
be no assurance that our ITD units will continue to perform at this level, or
that this performance will continue to be competitive with other technologies
available in the market.
Recycling of Hydrocarbon Contaminants: We have developed proprietary
processes that are embodied in the condensation process system unit, one of the
two principal components of our ITD units. Within this component the hydrocarbon
contaminants are condensed from the vapor state created in the heat exchange
unit back into a liquid state via the proprietary processes and placed into
storage for recycling back to the client. This allows the client to realize
actual savings from its ability to re-utilize the hydrocarbons. We believe that
this ability to recycle the hydrocarbon contaminants is an important competitive
advantage, as compared to the bioremediation, direct burn or "dig and haul"
remediation technologies.
Manufacturing of ITD Units: We have historically contracted with outside
fabricators to manufacture our ITD units. The primary contractors we have used
are National Oilwell and Houston ProFab. Currently, we have no ITD units under
construction by fabricators.
Subsequent Events: In January 2003 we signed a contract to process various
waste streams in a facility in Arkansas.
During March 2003 the Company obtained a loan of $1,500,000 from a private
investor group. The loan is to be funded in three $500,000 fundings on March
20, 2003; May 15, 2003; and August 15, 2003. The initial funding of March 20,
2003 has been received. The loan is collateralized by three ITD units and bears
interest at 12% per year. Principal payments are due in 20 quarterly
installments of $75,000 beginning in August 2003 with the final payment due in
May 2008. Warrants to purchase 1,500,000 shares of our common stock at a price
of $0.01 were issued in connection with this loan.
Also, during March 2003, the Company extended the maturity date of the
uncollateralized loans from April 16, 2003 to September 16, 2003.
We operate with our own trained personnel through wholly or partially-owned
subsidiaries as discussed above.
As of April 2003, five of our ITD units are located in the United States
and two in the United Arab Emirates.
COMPETITION
There are many companies that currently dispose of hazardous and industrial
wastes and remediate or clean contaminated sites. Such companies are continually
attempting to develop new and improved products and services. Other companies
utilize competing technologies and techniques in an attempt to provide more
economical or superior remediation services. Many of our competitors are
established companies with substantially greater capital resources, larger
research and development staffs and facilities and greater marketing
capabilities than us. There can be no assurance that we will be competitive in
the remediation and recycling industry in the future.
3
We obtain our contracts through competitive bidding and are in direct
competition with companies providing alternative means of, and utilizing
alternative technologies for, remediating environmental problems. The most
significant competition comes from companies utilizing "dig and haul," direct
burn, and bioremediation technology to remediate hydrocarbon contamination.
Companies utilizing the "dig and haul" method generally transport the
contaminated materials to other facilities for processing. We believe that the
technology we utilize is competitive because our equipment is mobile, and thus,
contaminated materials can be remediated on location. The waste processing,
remediation and recycling businesses are, to a large extent, dependent upon and
constrained by the costs and regulations associated with transporting such
wastes. More importantly, our remediation and recycling process addresses the
latent liability associated with the contamination at the site.
Companies utilizing direct burn technology use direct heat sources to
incinerate contaminants found in the solids. Due to the closed nature of the
heat transfer systems of our ITD units, we can safely handle much higher
concentrations of contaminants than conventional direct burn methods.
Conventional direct burn methods process material with maximum contamination
levels of 3% to 4% while our ITD units have processed materials with
contamination levels as high as 40%. In addition, the portable nature of our ITD
units permit them to be located at the contamination site. Our ITD units also
permit the customer to recapture certain valuable liquids which are otherwise
destroyed.
We differentiate ourselves from our competitors by providing significantly
higher operational service and a significantly higher value-added result for our
clients for the remediation of hydrocarbons from materials, and the subsequent
reclaiming of the hydrocarbons into liquids for customer recycling or resale.
For example, some of the design features of our ITD unit, which we believe
provide service-level advantages, include:
Remediation: Our ITD units remove 99.9% of hydrocarbon contaminants from
the waste-stream, effectively eliminating the client's latent liability.
Recycling: Our ITD units transform waste streams into value for our clients
by reclaiming valuable hydrocarbons for client recycling or resale. For example,
our equipment has reclaimed millions of gallons of diesel oil while processing
drill cuttings for major oil and gas participants.
Tonnage: Our ITD units have proven processing capability of 1 to 10 tons
per hour with up to 30% hydrocarbon-saturation in the soil. Some competitors are
capable of similar processing speeds, but at lower hydrocarbon-saturation
levels, resulting in throughput advantages for us.
Portability: Our ITD units are built on two 44 foot trailer beds for easier
transport to our client's location, avoiding costly hauling expenses of
contaminated materials to a central location. In addition, the design of our ITD
units permit rig-down and/or rig-up in less than a day. Some competitive units
are much less transportable, or not transportable at all.
Wide Range of Hydrocarbons Treated: Our ITD units operate at low
temperatures (200 degrees Fahrenheit), high temperatures (1,000 degrees
Fahrenheit), and anywhere in between, thereby enabling the remediation of wide
ranges of hydrocarbon contaminants encountered at a client's site including both
oil and gas and industrial waste. We believe that competition in the industry is
concentrated in remediation services, whereas our ITD technology not only
provides remediation services, but also is capable of reclaiming and recycling
valuable hydrocarbons. Further, we believe that our pricing policies are
competitive. No assurance, however, can be given that we will be able to
successfully compete with other companies or alternative technologies.
4
GOVERNMENTAL REGULATIONS -- COST OF COMPLIANCE
We render services in connection with the remediation, recycling and
disposal of various wastes. Federal, state and local laws and regulations have
been enacted regulating the handling and disposal of wastes and creating
liability for certain environmental contamination caused by such waste.
Environmental laws regulate, among other things, the transportation, storage,
handling and disposal of waste. Governmental regulations govern matters such as
the disposal of residual chemical wastes, operating procedures, waste water
discharges, air emissions, fire protection, worker and community right-to-know,
and emergency response plans. Moreover, so-called "toxic tort" litigation has
increased markedly in recent years as persons allegedly injured by chemical
contamination seek recovery for personal injuries or property damage. These
legal developments present a risk of liability should we be deemed to be
responsible for contamination or pollution caused or increased by any
evaluation, remediation or cleanup effort conducted by us, or for an accident
which occurs in the course of such remediation or cleanup effort. There can be
no assurance that our policy of establishing and implementing proper procedures
for complying with environmental regulations will be effective at preventing us
from incurring a substantial environmental liability. If we were to incur a
substantial uninsured liability for environmental damage, our financial
condition could be materially adversely affected.
We presently have the ability to deliver remediation and recycling services
that meet applicable federal and state standards for the delivery of its
services, and for the level of contaminant removal. The government can, however,
impose new standards. If new regulations were to be imposed, we may not be able
to comply in either the delivery of our services, or in the level of contaminant
removal from the waste stream.
Operating permits are generally required by federal and state environmental
agencies for the operation of our ITD units. Most of these permits must be
renewed periodically and the governmental authorities involved have the power,
under various circumstances, to revoke, modify, or deny issuance or renewal of
these permits. Site-related permits, however, are generally the responsibility
of the client.
EMPLOYEES
We currently have 15 employees, 5 of whom are in domestic and international
management or supervisory positions, including corporate and administrative
functions. None of our employees are represented by a union. We consider our
employee relations to be good.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our Common Stock is Colonial Stock
Transfer Company, Inc., addressed at 66 Exchange Place, Salt Lake City, Utah
84111; (801) 355-5740.
ITEM 2. PROPERTIES
Our principal executive offices are located in leased facilities at 2600
South Loop West, Suite 645, Houston, Texas 77054, which consist of 3,852 square
feet. The lease for the executive offices will expire in May, 2003. We believe
that our offices are adequate for our present needs and that suitable space will
be available to accommodate our future needs.
We incorporate by reference in response to this item the information set
forth in Note 6 of the Notes to Consolidated Financial Statements included in
item 8 of this report.
5
ITEM 3. LEGAL PROCEEDINGS
In July 2002, OnSite filed a lawsuit styled OnSite Technology LLC v.
Duratherm, Inc., Duratherm Group, Inc., Steven R. Heuer and Victor R. Reynolds;
Civil Action No. H-02-2624; In the United States District Court for the Southern
District of Texas against Duratherm, Inc. and Duratherm Group, Inc., Steven R.
Heuer and Victor R. Reynolds. OnSite's lawsuit alleges that Duratherm's
remediation operations at its Galveston County, Texas facility infringed on
OnSite's U.S. Patent No. 5,738,031 and requested a declaratory judgment that
OnSite's operation of its remediation process does not infringe either of Heuer
and Reynolds' U.S. Patent Nos. 4,990,237 and 5,269,906 over which Duratherm
alleges control. The Defendants have filed an answer asserting that they do not
infringe on OnSite's patent and that such patent is invalid. Defendants also
deny there is any controversy between the parties regarding the Heuer and
Reynolds' patents. This case is in the early stages of discovery.
In July 2002, OnSite also initiated litigation styled OnSite Technology,
LLC v. Duratherm, Inc. et al.; Cause No. 02CV0801; In the 56th Judicial District
Court of Galveston County, Texas, against Duratherm, Inc., Duratherm Group,
Inc., Barry Hogan and Jim Hogan. This lawsuit alleges that in November 1999,
OnSite and Waste Control Specialists, L.L.C. ("WCS") entered into a contract
wherein OnSite would, among other things, provide the necessary services,
supplies and equipment to perform recycling and remediation services utilizing
an indirect thermal desorption unit as specified therein. On information and
belief, in late July or early August 2000, Defendants, acting in concert through
Duratherm, Inc., sent or caused to be sent a letter(s) and/or other
communication(s) to WCS, which OnSite alleges contained statements that were
false and intended to deceive WCS, as to OnSite and OnSite's technology and
indirect thermal desorption unit. As a result of such false, deceptive and
malicious statements, WCS terminated its contract with OnSite. In August 2000,
Duratherm, Inc. filed suit against OnSite and WCS in the United States District
Court for the Southern District of Texas under Civil Action No. H-00-2727, which
suit was subsequently dismissed with prejudice by the United States District
Judge. OnSite alleges that such suit was malicious and contained false
statements and allegations about OnSite and OnSite's technology and indirect
thermal desorption unit. In February, 2003 OnSite amended its petition to add
John C. Hilliard as a defendant and to add as a claim against the defendants,
the loss of a prospective contract with ExxonMobil. OnSite has also amended its
petition to include as a defendant Duratherm's counsel, Conley Rose P.C., (for
purposes of injunctive relief). The causes of action alleged by OnSite against
the Defendants are (i) interference with contract; (ii) unfair competition and
business disparagement; (iii) unjust enrichment; and (iv) injury to OnSite's
business reputation. OnSite is seeking actual, consequential, incidental and
compensatory damages, including, but not limited to, disgorgement, pre- and
post-judgment interest, attorney's fees and costs and exemplary and punitive
damages. OnSite is also seeking to enjoin these defendants and Duratherm's
counsel, Conley Rose P.C., from interfering with the current and prospective
business relationships of OnSite with regard to the thermal desorption units.
The Defendants in this litigation, other than John C. Hilliard and Conley Rose
P.C., have filed an answer denying the allegations contained in OnSite's
petition. The answers from John C. Hilliard and Conley Rose P.C. are not yet due
as of March 26, 2003. This case is in the early stages of discovery.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the
fourth quarter of 2002.
EXECUTIVE OFFICERS OF THE REGISTRANT
We have presented the below information about our executive officers as of
March 2003. Officers are elected annually by the Board of Directors and serve
until their successors are chosen or until their resignation or removal.
NAME AGE POSITION
---- --- --------
James S. Percell 59 Director, Chairman, CEO and President
Michael D. Thompson 51 Chief Financial Officer and Secretary
6
BIOGRAPHIES
JAMES S. PERCELL serves as Director, Chairman, CEO and President also
serves as President of the our subsidiaries, NFE and OnSite. Mr. Percell became
a director and President, CEO and a director of NFE in November, 1995. Mr.
Percell became President and CEO of our consolidated company in January 1996.
Mr. Percell also serves as President of Percell & Associates, a project
developer of facilities in the hydrocarbon industry. From 1985-1993, Mr. Percell
served as Vice-President of Belmont Constructors, Inc., a heavy industrial
contractor. From 1982-1984, he served as President of Capital Services
Unlimited, an international supply company for refining, petrochemical and oil
field compressor stations, modular refineries and modular oilfield components.
From 1977-1980, Mr. Percell served as President of Percell & Lowder, Inc., an
oilfield fabricator of onshore and offshore facilities, and from 1960-1977, he
served as project manager for various onshore and offshore projects. He attended
Amarillo College in Amarillo, Texas.
MICHAEL D.THOMPSON became our Chief Financial Officer in September 2002.
Beginning in 1997, Mr. Thompson served as Chief Operating Officer of Outsourcing
Services, Inc., an accounting and consulting firm. From 1990 through 1996, Mr.
Thompson was Chief Financial Officer of The Hanover Company, a fully integrated
national real estate development firm. Mr. Thompson is a certified public
accountant. Mr. Thompson has a B.B.A. degree with honors from the University of
Texas.
CERTAIN SECURITIES FILINGS
The Company believes that the reports required by section 16(a) of the
Exchange Act have been filed timely.
7
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
PRICE RANGE OF COMMON STOCK
Our Common Stock commenced trading on the OTC Bulletin Board under the
symbol "ELSF" on October 17, 2002. Prior thereto, for the periods set forth
below, our common stock traded on the American Stock Exchange under the symbol
"EVV". The following table sets forth the range of high and low closing sales
prices of our Common Stock for the periods shown:
COMMON STOCK PRICE RANGE
HIGH LOW
2001
First Quarter . . . . . . . . . . . . . . $0.43 $0.15
Second Quarter. . . . . . . . . . . . . . $0.20 $0.05
Third Quarter . . . . . . . . . . . . . . $0.16 $0.08
Fourth Quarter. . . . . . . . . . . . . . $0.38 $0.06
2002
First Quarter . . . . . . . . . . . . . . $0.40 $0.20
Second Quarter. . . . . . . . . . . . . . $0.28 $0.12
Third Quarter . . . . . . . . . . . . . . $0.18 $0.03
Fourth Quarter. . . . . . . . . . . . . . $0.08 $0.02
On March 24, 2003, the closing price of our Common Stock was $0.20 per
share. On the same date, we had approximately 1,000 stockholders of record,
including broker-dealers holding shares beneficially owned by their customers.
EQUITY COMPENSATION PLAN INFORMATION
NUMBER OF SECURITIES
REMAINING AVAILABLE
NUMBER OF SECURITIES FOR FUTURE ISSUANCE
TO BE ISSUED UPON WEIGHTED-AVERAGE UNDER EQUITY
EXERCISE OF EXERCISE PRICE OF COMPENSATION PLANS
OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, (EXCLUDING SECURITIES
WARRANTS AND RIGHTS WARRANTS AND RIGHTS REFLECTED IN COLUMN (a))
PLAN CATEGORY (a) (b) (c)
- ------------------- --------------------- ---------------------- ------------------------
Equity compensation
plans approved by
security holders 547,500 $ 1.69 252,500
Equity compensation
plans not approved
by security holders 4,241,162 1.34 -
--------------------- ---------------------- ------------------------
Total 4,788,662 $ 1.38 252,500
===================== ====================== ========================
For information relating to the equity compensation plans reference is
made to footnote 8 to our Financial Statements, Stockholders' Equity-Stock
Options.
8
DIVIDEND POLICY
We have not paid, and do not currently intend to pay cash dividends on our
Common Stock in the foreseeable future. The current policy of our Board of
Directors is to retain all earnings, if any, to provide funds for the operation
and expansion of our business. The declaration of dividends, if any, will be
subject to the discretion of our Board of Directors, which may consider such
factors as our results of operations, financial condition, capital needs and
acquisition strategy, among other factors.
ITEM 6. SELECTED FINANCIAL DATA
We have derived the following selected consolidated financial information
as of December 31, 2002, 2001 and 2000 and for the years then ended, from our
audited consolidated financial statements included in item 8 of this annual
report. You should read this information in conjunction with those consolidated
financial statements and the notes thereto. We have derived the selected
consolidated financial information as of December 31, 1999 and 1998, and for the
years then ended, from our audited consolidated financial statements of the
Company, that are not included herein. Please read "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in item 7 of this
annual report.
YEAR ENDED DECEMBER 31,
-----------------------
2002 2001 2000 1999 1998
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA :
Revenue $ 943 $ 2,987 $11,250 $13,514 $10,672
Income (loss) from operations (3,176) (3,683) 1,029 3,098 1,404
Net income (loss) (3,043) 1,507 (1,462) (483) (799)
Basic and diluted net income
(loss) per share:
Basic $ (0.33) $ 0.12 $ (0.19) $ (0.12) $ (0.17)
Diluted $ (0.33) $ 0.05 $ (0.19) $ (0.12) $ (0.17)
BALANCE SHEET DATA:
Working capital surplus (deficit) $(1,186) $ 766 $ (258) $ 1,564 $ 5,431
Property and equipment, net 5,506 6,539 8,929 10,835 8,256
Total assets 7,079 10,396 15,153 18,990 20,164
Long-term debt 0 0 2,163 4,235 6,636
Minority Interest 1,943 2,040 2,872 3,554 2,073
Shareholders' equity 3,583 6,879 5,664 6,956 7,813
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our
consolidated financial statements and related notes included in item 8 of this
annual report, and our "Forward-Looking Statements" which discusses certain
limitations inherent in such statements.
9
INFORMATION REGARDING AND FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
We are including the following cautionary statement in this Form 10-K to
make applicable and take advantage of the safe harbor provision of the Private
Securities Litigation Reform Act of 1995 for any forward-looking statements made
by us, or on behalf of us. Forward-looking statements include statements
concerning plans, objectives, goals, strategies, future events or performance
and underlying assumptions and other statements which are other than statements
of historical facts. Certain statements in this Form 10-K are forward-looking
statements. Words such as "expects", "anticipates", "estimates" and similar
expressions are intended to identify forward-looking statements. Such statements
are subject to risks and uncertainties that could cause actual results to differ
materially from those projected. Such risks and uncertainties are set forth
below. Our expectations, beliefs and projections are expressed in good faith and
are believed to have a reasonable basis, including without limitation, our
examination of historical operating trends, data contained in our records and
other data available from third parties. There can be no assurance, however,
that our expectations, beliefs or projections will result, be achieved, or be
accomplished.
In addition to other factors and matters discussed elsewhere herein, the
following are important factors that, in our view, could cause material adverse
affects on our financial condition and results of operations: our ability to
secure contracts for our ITD units; our ability to attain widespread market
acceptance of our technology; our ability to obtain acceptable forms and amounts
of financing; the demand for, and price level of, our services; competitive
factors; the actual useful life of our ITD Units; ability to mitigate
concentration of business in a small number of customers; the evolving industry
and technology standards; the ability to protect proprietary technology; the
dependence on key personnel; the effect of business interruption due to
political unrest; and our ability to maintain acceptable utilization rates on
our equipment. We are not obligated to update or revise these forward-looking
statements to reflect the occurrence of future events or circumstances.
OVERVIEW
We are engaged in the development, production and sale of environmental
recycling technologies and services to waste management companies, oil and gas
companies and other industrial customers through our wholly owned subsidiary,
OnSite Technology, L.L.C. ("OnSite"). We are devoting substantially all of our
efforts to the development of markets for OnSite's services. We are currently
providing recycling services to companies engaged in waste management, refining,
and other industrial applications.
10
Refining and other types of industrial activities, often produce
significant quantities of petroleum-contaminated waste, from which our Indirect
Thermal Desorption ("ITD") process can extract and recover the hydrocarbons as
re-useable or re-saleable liquids, and produce recycled solids compliant with
environmental regulations. The activities of OnSite include use of ITD
technology to address hydrocarbon contamination problems and hydrocarbon
recycling and reclamation opportunities at heavy industrial, refining,
petrochemical and waste management sites, as well as at Superfund, DOD and DOE
sites.
On December 17, 1997, we acquired the remaining 50% interest in OnSite from
Parker Drilling Co. ("Parker"), giving us complete control of the ITD technology
owned by OnSite, and providing us with a wholly-owned operating subsidiary that
forms the cornerstone of our operations. Total purchase consideration in the
OnSite acquisition was financed by us through a private placement of Convertible
Preferred and Preferred Stock, combined with senior secured notes and warrants
to purchase shares of our Common Stock. We included OnSite's operating results
in our statement of operations for the year ended December 31,1997, as though
the acquisition took place at the beginning of that year, and deducted as a
separate line item the pre-acquisition earnings attributable to the former 50%
owner of OnSite.
We have focused essentially all of our attention on our now wholly-owned
business operations in OnSite. OnSite was formed, as a 50%-owned joint company
with Parker, as a means for assembling the capital necessary to build and
improve the ITD process and to generate market awareness and acceptance of ITD
technology. We expect that a substantial portion of our revenues will continue
to be generated from waste management, petrochemical, and industrial
applications.
During the period 1996-2000 a substantial portion of our revenues were
generated from major international oil and gas industry participants in Latin
America (Colombia, Venezuela and Mexico) as well as from other domestic and
foreign industrial applications. As of April 2003 we have for the most part
completed our foreign contract operations, and have in fact taken steps to close
down certain of our foreign subsidiaries as outlined below. We are now
concentrating our marketing efforts and resources on domestic downstream plants,
manufacturing facilities and waste management facilities, where our proprietary
equipment and process have a competitive advantage in waste minimization, and
recycling/reuse of hazardous waste markets -- including industrial, petroleum
and petro-chemical waste streams.
Highlights of our foreign operations follow:
OnSite Colombia, Inc. ("OSC"): In November 1996, we formed a 50%-owned
joint company OSC to provide hydrocarbon contaminated soil recycling services to
oil and gas industry participants operating in Colombia. Having completed
contract operations in Colombia, we re-acquired the 50% minority ownership of
OSC and subsequently initiated formal procedures to close-down OSC. As of April
2003 the close-down process was in its final stages.
OnSite Venezuela, Inc. ("OSV"): In January 1998, we formed our 100% owned
subsidiary OSV, and commenced operations to provide hydrocarbon contaminated
soil recycling services to oil and gas industry participants operating in
Venezuela. Following completion of contract operations in Venezuela, the
close-down of this entity was completed.
OnSite Arabia, Inc. ("OSA"): In December 1998, we formed a 50%-owned joint
company OSA to provide hydrocarbon contaminated soil recycling services to oil
and gas industry participants operating in the Arabian Gulf region.
OnSite Environmental UK, Ltd ("OSE"): In April 1999, we formed OSE, a
wholly-owned subsidiary, for operations in Scotland. Having completed contract
operations in Scotland, the close-down of this entity was completed.
OnSite Mexico LLC ("OSM"): In July 1999, we registered OSM, a wholly-owned
subsidiary, for operations in Mexico. OSM has completed operations and its
close-down procedures have commenced.
OST Ambiental S de RL de CV ("SRL"): In March 2001, we registered SRL, a
wholly-owned subsidiary, for operations in Mexico. SRL has recently completed
all operations and its close-down procedures have been completed.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of its financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosure of contingent assets
and liabilities. On an ongoing basis, we evaluate our estimates and our
estimates are based on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances. These estimates and
assumptions provide a basis for our judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Actual
results may differ from our estimates under different assumptions or conditions,
and these differences may be material.
We believe that the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
We recognize revenue at the time services are performed, or in the event of
the sale of an ITD unit, when the equipment is shipped.
11
We record property and equipment at cost. and compute depreciation using
the straight-line method over an estimated useful live of 8 years on our ITD
Units and 3 to 5 years on our office furniture and equipment and transportation
and other equipment. Effective October 1, 2002, we changed the estimated useful
lives of our ITD units from 5 years to 8 years to more accurately reflect our
experience with the useful lives of the units and to conform to industry
practices for equipment used in similar applications. Any additions or
improvements that increase the value or extend the life of our assets are
capitalized and expenditures for normal maintenance and repairs are expensed as
incurred. Disposals are removed from the accounts at cost less accumulated
depreciation and any gain or loss from disposition is reflected in operations
currently.
RESULTS OF OPERATIONS
COMPARISON OF OPERATING RESULTS -- YEARS ENDED DECEMBER 31, 2002 AND 2001
Summary. For the year ended December 31, 2002, we had a net loss of
$3,043,000 as compared to a 2001 net income of $1,507,000. The decrease in
earnings was primarily the result of a non-recurring gain on sale of three ITD
units and certain technical rights during the fourth quarter of 2001. Additional
information follows.
Revenue and Gross Margin. Revenue of $943,000 for 2002 generated a
$1,025,000 negative gross margin as compared to revenue of $2,987,000 and a
negative gross margin of $559,000 in 2001. The decrease in revenue and gross
margin was due to a substantial drop in ITD utilization during 2002. On average
we had 0.1 units in operation in 2002 as compared to 1.8 units during 2001. The
decreased utilization was due to the completion of contract operations in Mexico
at the end of 2001.
Selling, General and Administrative ("SGA") Expense. SGA expenses during 2002
were nearly 35% below the prior year level primarily due to the winding-down of
contract operations in Colombia, Mexico, and Venezuela.
Additional savings were recognized by reductions in SGA expenses in the U.S
Amortization of Engineering Design and Technology. This represents the
amortization of Acquired Engineering Design and Technology costs, an intangible
asset related to the December 1997 acquisition of the remaining 50% interest in
OnSite from Parker Drilling. The intangible asset is being amortized over an
8-year estimated economic life.
Research & Development Costs ("R&D") Expense. The expense for 2002 is
$30,000 as compared to $71,000 for 2001. This expense reflects ongoing R&D
improvements to our Series 6000 ITD system design.
Interest Expense. During 2002, $42,000 of interest expense was incurred,
compared to interest expense of $839,000 for 2001 (including amortization of
debt issuance costs of $344,000). The decrease in interest expense for 2002 was
mainly due to the retirement of all of our senior debt at the end of 2001.
Other Income (Expense). The category "Other" is mainly composed of foreign
currency translation gains and losses. The financial statements of our foreign
subsidiaries are measured as if the functional currency was the U.S. Dollar
("USD"). The re-measurement of local currencies into USD created favorable
(unfavorable) translation adjustments that were included in net income in each
respective year 2002 and 2001.
Income Taxes. The $79,000 tax benefit in 2002 is the result of a refund of
2001 federal income tax. Approximately half of the 2001 tax provision relates to
state income tax effects, with the balance due to foreign income tax effects
mainly in our Mexico subsidiaries. We incurred net operating losses ("NOLs") in
the U.S. in recent years, some of which were used in 2001 to offset taxes on our
2001 taxable income. The balance of our NOLs may be used to offset taxable
income reported in future periods. The NOLs have generated deferred tax assets,
but due to uncertainties regarding the future realization of these assets, a
valuation allowance has been provided for the full amount of the deferred tax
assets. However, presently there can be no assurances that the NOLs will be
utilized.
Minority Interest. Minority interest for 2002 reflects our 50% minority
partner's interest in the net loss of OnSite Arabia because our Colombian
operations were completed and Colombian subsidiary closed down in 2001. During
2001, minority interest reflects our 50% minority partner's interest in the net
loss of OnSite Colombia and OnSite Arabia.
12
COMPARISON OF OPERATING RESULTS -- YEARS ENDED DECEMBER 31, 2001 AND 2000
Summary. For the year ended December 31, 2001, we earned net income of
$1,507,000 as compared to a 2000 net loss of $1,462,000. The $2,969,000 net
income increase was primarily due to the gain on sale of three ITD units and
certain technical rights during the fourth quarter of 2001, partly offset by 57%
lower equipment utilization during 2001. Additional information follows.
Revenue and Gross Margin. Revenue of $2,987,000 for 2001 generated $559,000
negative gross margin as compared to revenue of $11,250,000 and gross margin of
$5,219,000 in 2000. The decrease in revenue and gross margin was due to a
substantial drop in ITD utilization during 2001, where on average we had 1.8
units in operation as compared to 4.2 units during 2000. Nearly 80% of the
decreased utilization was due to the completion of contract operations in
Colombia at the end of 2000.
Selling, General and Administrative ("SGA") Expense. SGA expenses during
2001 were nearly 29% below the prior year level primarily due to the
winding-down of contract operations in Colombia.
Amortization of Engineering Design and Technology. This represents the
amortization of Acquired Engineering Design and Technology costs, an intangible
asset related to the December 1997 acquisition of the remaining 50% interest in
OnSite from Parker Drilling. The intangible asset is being amortized over an
8-year estimated economic life.
Research & Development Costs ("R&D") Expense. The expense for 2001 is at
the 2000 level, and reflects ongoing R&D improvements to our Series 6000 ITD
system design.
Interest Expense. During 2001, $839,000 of interest expense was incurred
(including amortization of debt issuance costs of $344,000), compared to
interest expense of $1,018,000 for 2000 (including amortization of debt
issuance costs of $372,000). The $179,000 overall decrease in interest expense
for 2001 was mainly due to lower interest rates during 2001, and to a lessser
degree, to less amortization of debt issuance costs as noted above.
Other Income (Expense). Other income is mainly composed of foreign currency
translation gains. The financial statements of our foreign subsidiaries are
measured as if the functional currency was the U.S. Dollar ("USD"). The
re-measurement of local currencies into USD created favorable translation
adjustments that were included in net income in each respective year 2001 and
2000.
Income Taxes. Approximately half of the 2001 tax provision relates to state
income tax effects, with the balance due to foreign income tax effects mainly in
our Mexico subsidiaries. The tax provision in 2000 primarily related to foreign
income tax effects in our Colombia, Venezuela, Mexico and Scotland subsidiaries.
We incurred net operating losses ("NOLs") in the U.S. in recent years, some of
which were used in 2001 to offset taxes on our 2001 taxable income. The balance
of our NOLs may be used to offset taxable income reported in future periods. The
NOLs have generated deferred tax assets, but due to uncertainties regarding the
future realization of these assets, a valuation allowance has been provided for
the full amount of the deferred tax assets. We are implementing tax planning
strategies, which if successful, may result in our recognizing these deferred
tax assets in future periods, which would result in significantly reduced
effective tax rates. However, presently there can be no assurances that the NOLs
will be utilized.
Minority Interest. Minority interest for 2001 reflects our 50% minority
partner's interest in the net loss of OnSite Colombia and OnSite Arabia. During
2000, minority interest reflects our 50% minority partner's interest in the net
income of OnSite Colombia, partly offset by the net loss of OnSite Arabia.
LIQUIDITY AND CAPITAL RESOURCES
We currently have no significant commitments for capital expenditures.
Since our inception, we have expended a significant portion of our
resources to develop markets and industry awareness of our ITD remediation and
recycling/reclamation process technology. Our efforts have been focused
primarily on hydrocarbon soil contamination inherent in oil and gas exploration
activities. Our efforts to develop markets and produce equipment have required
significant amounts of capital.
13
In December 2001 we completed the sale of three of our ITD units along with
certain licensing rights, and utilized the bulk of the proceeds from the sale to
retire our senior debt. With the exception of this sale, we have incurred
recurring net losses and have been dependent on revenue from a limited customer
base to provide cash flows. We completed our most significant service contract
in December 2000 and during 2001 and 2002 have been exploring ways to replace
that revenue. During 2001 and 2002 we've experienced a continued tightening of
cash reserves and prior to repaying our senior debt in December 2001, we took
actions to delay payments on that debt. In January 2003 we signed a contract to
process various waste streams at a facility in Arkansas. We are currently
seeking to obtain additional service contracts in our served markets and are
considering strategic alternatives including the possible additional sale of
certain of our assets.
To the extent our cash reserves and cash flows from operations are
insufficient to meet future cash requirements, we will need to successfully
raise funds through an equity infusion, the issuance of debt securities or the
sale of ITD units. Financing may not be available on terms acceptable to us, or
at all. Further, the sale of additional equity or convertible debt securities
may result in dilution to our stockholders.
During July 2002, the Company obtained uncollateralized loans totaling
$250,000 from Cahill Warnock Strategic Partners, L. P. and Strategic Associates,
L.P. These loans bear interest at 12% per year and are due in September 2003.
During March 2003, the Company obtained a loan of $1,500,000 from a private
investor group. The loan is to be funded in three $500,000 fundings on March
20, 2003; May 15, 2003; and August 15, 2003. The initial funding of March 20,
2003 has been received. The loan is collateralized by three ITD units and bears
interest at 12% per year. Principal payments are due in 20 quarterly
installments of $75,000 beginning in August 2003 with the final payment due in
May 2008. Warrants to purchase 1,500,000 shares of our common stock at a price
of $0.01 were issued in connection with this loan.
The company expects that its existing cash reserves, cash flows from
operations, and financing of March 2003 will be sufficient to cover the
Company's cash requirements for 2003. However, there can be no assurance that
existing sources of cash will cover the Company's 2003 cash flow requirements.
The Company's predecessor auditor included an explanatory paragraph in
their auditor's report on the Company's consolidated financial statements, as of
December 31, 2001 and for the two years in the period then ended, describing the
uncertainty about the Company's ability to continue as a going concern. The
Company's current auditors issued an unqualified opinion, without a going
concern explanatory paragraph, on the Company's 2002 financial statements based
upon the circumstances set forth herein.
The functional currency of our foreign operations is the U.S. dollar
because customer invoicing, customer receivables, imported equipment and many of
the operating cost factors are denominated in U.S. dollars. We plan to continue
to implement the same approach to minimize our risks associated with foreign
exchange fluctuation and its affect on our profitability.
ACCOUNTING MATTERS AND RECENTLY ISSUED PRONOUNCEMENTS
In June 1998 and June 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities" and SFAS No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities", respectively.
These statements establish accounting and reporting standards requiring that
every derivative instrument be recorded on the balance sheet as either an asset
or liability measured at its fair value. SFAS Nos. 133 and 138 also require that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. SFAS No.s 133 and 138 are
effective for fiscal years beginning after June 15, 2000. We do not currently
hold derivative instruments or engage in hedging activities and, accordingly,
the adoption of these new standards is not expected to have a material impact on
our results of operations or financial position.
14
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," which requires all business combinations initiated after June 30,
2001 be accounted for using the purchase method. In addition, SFAS No. 141
further clarifies the criteria to recognize intangible assets separately from
goodwill. Specifically, SFAS No. 141 requires that an intangible asset may be
separately recognized only if such an asset meets the contractual-legal
criterion or the separability criterion. The implementation of SFAS No. 141 did
not have a material impact on the Company's results of operations or financial
position.
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," under which goodwill and intangible assets with indefinite useful lives
are no longer amortized but will be reviewed for impairment annually, or more
frequently if certain events or changes in circumstances indicate that the
carrying value may not be recoverable. The impairment test for goodwill involves
a two-step process: step one consists of a comparison of the fair value of a
reporting unit with its carrying amount, including the goodwill allocated to
each reporting unit. If the carrying amount is in excess of the fair value, step
two requires the comparison of the implied fair value of the reporting unit
goodwill with the carrying amount of the reporting unit goodwill. Any excess of
the carrying value of the reporting unit goodwill over the implied fair value of
the reporting unit goodwill will be recorded as an impairment loss. The
impairment test for intangible assets with indefinite useful lives consists of a
comparison of fair value to carrying value, with any excess of carrying value
over fair value being recorded as an impairment loss. Intangible assets with
finite useful lives will continue to be amortized over their useful lives and
will be reviewed for impairment in accordance with SFAS No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets." The implementation of SFAS No.
142 at did not have a material impact on our results of operations or financial
position.
In August 2001, the FASB issued SFAS No. 144, which supercedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," and certain provisions of APB Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions." SFAS No. 144 retains the fundamental provisions of
SFAS No. 121 related to: (i) the recognition and measurement of the impairment
of long-lived assets to be held and used, and (ii) the measurement of long-lived
assets to be disposed by sale. It provides more guidance on estimating cash
flows when performing recoverability tests, requires long-lived assets to be
disposed of other than by sale to be classified as held and used until disposal,
and establishes more restrictive criteria to classify long-lived assets as held
for sale. In addition, SFAS No. 144 supersedes the accounting and reporting
provisions of APB Opinion No. 30 for the disposal of a segment of a business.
However, it retains the basic provisions of APB Opinion No. 30 to report
discontinued operations separately from continuing operations and extends the
reporting of a discontinued operation to a component of an entity. The
implementation of SFAS No. 144 did not have a material impact on our results of
operations or financial position.
We have evaluated the carrying value of long-lived assets, including
associated intangibles. We performed an evaluation of recoverability by
comparing the estimated future undiscounted cash flows associated with the asset
to the asset's carrying amount to determine if a write-down to market value or
discounted cash flow is required. Given the homogeneous nature and geographic
deployment flexibility of our assets, and based upon a recent evaluation by us,
impairment of our long-lived assets has not been deemed necessary. However,
there can be no assurances that our ongoing evaluation would not result in an
impairment-related write-down.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses financial
accounting and reporting for costs associated with exit or disposal activities
and supersedes Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires companies to recognize costs associated with exit or disposal
activities when they are incurred rather than at the date of a commitment to an
exit or disposal plan. In addition, SFAS No. 146 establishes that fair value is
the objective for initial measurement of the liability. SFAS No. 146 is
effective for exit or disposal activities initiated after December 31, 2002, but
early adoption is permitted. We do SFAS No 146 to have a significant impact on
our financial position or results of operations.
15
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation", which amends SFAS No. 123 to provide alternative methods of
transition for an entity that voluntarily changes to the fair value method of
accounting for stock based employee compensation. It also amends the disclosure
provisions of SFAS No. 123 to require prominent disclosure about the effects on
reported net income of an entity's accounting policy decisions with respect to
stock based employee compensation. Finally, SFAS No. 148 amends APB Opinion No.
28, "Interim Financial Reporting", to require disclosure of those effects in
interim financial statements. SFAS No. 148 is effective for fiscal years ended
after December 15, 2002, but early adoption is permitted. We will adopt SFAS
No. 148 on January 1, 2003; however, we do not expect the adoption to have a
significant impact on our financial reporting because we do not use stock based
compensation extensively.
SUBSEQUENT EVENTS
In January 2003 we signed a contract to process various waste streams at a
facility in Arkansas.
During March 2003, the Company obtained a loan of $1,500,000 from a private
investor group. The loan is to be funded in three $500,000 fundings on March
20, 2003; May 15, 2003; and August 15, 2003. The initial funding of March 20,
2003 has been received. The loan is collateralized by three ITD units and bears
interest at 12% per year. Principal payments are due in 20 quarterly
installments of $75,000 beginning in August 2003 with the final payment due in
May 2008. Warrants to purchase 1,500,000 shares of our common stock at a price
of $0.01 were issued in connection with this loan.
Also during March 2003, the Company extended the maturity date of the
uncollateralized notes from April 16, 2003 to September 16, 2003.
ACCOUNTING ESTIMATES AND CHOICES
Preparation of financial statements under generally accepted accounting
principles in the United States of America requires us to make choices between
acceptable methods of accounting and to make estimates of future events to
determine the value we report for certain assets and liabilities at the date of
our financial statements and the value we report for revenues and expenses in a
period covered by our financial statements. While we try to be as precise as
possible in making these estimates, many of them are subjective in nature and
involve matters of judgement. We believe the most subjective and material
estimates in our financial statements are the reserve, if any, which we report
for accounts receivable, the amount of our deferred taxes and our accrued
warranty costs.
Accounts Receivable. When an account receivable is considered impaired, the
amount of the impairment is measured based on the present value of expected
future cash flows or the fair value of collateral. Impairment losses
(recoveries) are included in the allowance for doubtful accounts.
Deferred Taxes. We record a valuation allowance to reduce our deferred
income tax assets to an amount that we believe to be realizable under the
"more-likely-than-not" recognition criteria. While we consider future taxable
income and ongoing prudent and feasible tax planning strategies in assessing the
need for a valuation allowance, in the future we may change our estimate of the
amount of the deferred income tax assets that would "more-likely-than-not" be
realized, resulting in an adjustment to the deferred income tax asset valuation
allowance that would either increase or decrease, as applicable, reported net
income in the period.
Accrued Warranty and Other Contingent Costs. We record an accrual for
product warranty and other contingencies when estimated future expenditures
associated with such contingencies become probable, and the amounts can
reasonably be estimated. However, new information may become available, or
circumstances (such as applicable laws and regulations) may change, thereby
resulting in an increase or decrease in the amount required to be accrued for
such matters (and therefore a decrease or increase in reported net income in the
period of such change).
We believe that all of the estimates we used to prepare our financial
statements were reasonable at the time we made them, but circumstances may
change requiring us to revise our estimates in ways that could have a material
adverse impact on our results of operations or financial position.
16
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to market risk related to fluctuations in the value of the
U.S. dollar compared to certain foreign currencies. We have a subsidiary that
operates in the Arabian Gulf region. However, the functional currency used by
this operating unit is the U.S. dollar. Substantial portions of this operating
unit's invoicing, customer receivables, imported equipment and many operating
cost factors are denominated in dollars. We attempt to maintain a balance
between assets and liabilities denominated in foreign currencies, however, such
currency levels are generally not significant. These factors serve to mitigate
the impact on our financial statements associated with foreign exchange
fluctuations.
A hypothetical 10% fluctuation of the U.S. dollar relative to the
currencies of the Arabian Gulf region would not have materially adversely
affected our fiscal year ended December 31, 2002 financial position, results of
operations, or cash flows, regardless of the direction of the change in relation
to the U.S. dollar. Our sensitivity analysis of the effects of changes in
foreign currency exchange rates does not factor in a potential change in revenue
levels.
While we are not a purchaser or producer of crude oil or related products,
our customers to date have generally been large multinational oil and gas
producing companies which are directly impacted by the fluctuations in the price
of crude oil. Decreases in the price of crude oil directly affect our current
customers' cash flows and may therefore affect our ability to collect
receivables and our ability to generate repeat and new business.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required hereunder is included in this report as set forth
in the "Table of Contents" on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no disagreements with our independent accountants regarding
accounting and financial disclosure matters.
On April 2, 2002, we dismissed PricewaterhouseCoopers, LLP as our
independent accountants. Our audit committee and board of directors
participated in and approved the decision to change independent accountants.
The reports of PricewaterhouseCoopers LLP on the financial statements for
2000 and 2001 contained no adverse opinion or disclaimer of opinion and were not
qualified as to audit scope or accounting principle, however such reports for
each of the years were modified to express substantial doubt with respect to our
ability to continue as a going concern.
In connection with the audits for 2000 and 2001 and through April 2, 2002,
there were no disagreements with PricewaterhouseCoopers LLP on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure, which disagreements if not resolved to the satisfaction of
PricewaterhouseCoopers LLP would have caused them to make reference thereto in
their report on the financial statements for such years.
During 2000 and 2001 and through April 2, 2002, there have been no
reportable events (as defined in Regulation S-K Item 304(a)(1)(v)).
PricewaterhouseCoopers LLP has furnished a letter addressed to the SEC
stating it agrees with the above statements.
17
We engaged Ham, Langston & Brezina, LLP as our new independent accountants
as of April 3, 2002. During 2000 and 2001 and through April 3, 2002, we have
not consulted with Ham, Langston & Brezina, LLP regarding either (i) the
application of accounting principles to a specified transaction, either
completed or proposed; or the type of audit opinion that might be rendered on
our financial statements, and neither a written report was provided to us or
oral advice was provided that Ham, Langston & Brezina, LLP concluded was an
important factor considered by us in reaching a decision as to the accounting,
auditing or financial reporting issue; or (ii) any matter that was either the
subject of a disagreement, as that term is defined in Item 304(a)(1)(iv) or
Regulation S-K and the related instructions to Item 304 of Regulation S-K, or a
reportable event, as that term is defined in Item 304(a)(1)(v) of Regulation
S-K.
18
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
The information required by this item is incorporated by reference to our
definitive proxy statement, which is to be filed with the Securities and
Exchange Commission (the "Commission") pursuant to the Securities Exchange Act
of 1934 (the "Exchange Act") within 120 days of our fiscal year ended December
31, 2002.
Information with respect to our executive officers is set forth under the
caption "Executive Officers of the Registrant" in Part I of the report.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to our
definitive proxy statement, which is to be filed with the Securities and
Exchange Commission (the "Commission") pursuant to the Securities Exchange Act
of 1934 (the "Exchange Act") within 120 days of our fiscal year ended December
31, 2002.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to our
definitive proxy statement, which is to be filed with the Securities and
Exchange Commission (the "Commission") pursuant to the Securities Exchange Act
of 1934 (the "Exchange Act") within 120 days of our fiscal year ended December
31, 2002.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference to our
definitive proxy statement, which is to be filed with the Securities and
Exchange Commission (the "Commission") pursuant to the Securities Exchange Act
of 1934 (the "Exchange Act") within 120 days of our fiscal year ended December
31, 2002.
ITEM 14. CONTROLS AND PROCEDURES
Mr. James S. Percell, our Chief Executive Officer and Mr. Michael D. Thompson,
our Chief Financial Officer, have concluded that our disclosure controls and
procedures are appropriate and effective. They have evaluated these controls and
procedures as of a date within 90 days of the filing date of this report on Form
10-K. There were no significant changes in our internal controls or in other
factors that could significantly affect these controls subsequent to the date of
their evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
19
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS
Reports of Independent Accountants/Auditors F-2
Consolidated Balance Sheet as of December 31, 2002 and 2001. F-4
Consolidated Statement of Operations for the years ended
December 31, 2002, 2001 and 2000 F-5
Consolidated Statement of Stockholders' Equity for the years
ended December 31, 2002, 2001 and 2000 F-6
Consolidated Statement of Cash Flows for the years ended
December 31, 2002, 2001 and 2000 F-7
Notes to Consolidated Financial Statements. F-8
(B) EXHIBITS
Exhibit
Number Description
------- -----------
3.1* -- Certificate of Incorporation of the Registrant, as amended.
3.2* -- Bylaws of the Registrant.
4.1* -- See Exhibits 3.1 and 3.2. for provisions of the Articles
of Incorporation and Bylaws of the Registrant defining
rights of holders of common stock of the Registrant.
4.2* -- Common Stock specimen.
4.3.1** -- Certificate of Designation, Preferences, Rights and
Limitations of Series B Convertible Preferred Stock.
4.3.2** -- Certificate of Designation, Preferences, Rights and
Limitations of Series C Preferred Stock.
4.3.3***** -- Certificate of Designation, Preferences, Rights and Limitations
of Series D Convertible Preferred Stock.
4.4* -- Form of Warrant Certificate dated December 17, 1997
(Included in Exhibit 4.8).
4.5* -- Form of Registration Rights Agreement pursuant to Private
Placement Memorandum dated September 18, 1996.
4.6* -- Form of Registration Rights Agreement dated December 17,
1997, between the Company and Cahill, Warnock Strategic
Partners Fund, L.P., Strategic Associates, L.P., Newpark
Resources, Inc. and James H. Stone.
4.7* -- Form of Warrant Agreement dated December 17, 1997,
between the Company and Cahill, Warnock Strategic
Partners Fund, L.P., Strategic Associates, L.P., Newpark
Resources, Inc. and James H. Stone.
4.8*** -- Form of Registration Rights Agreement dated December 7, 1998.
10.1.1***** -- Agreement in Principal dated August 17, 2000.
10.1.2****** -- Agreement dated March 1, 2001.
20
10.2* -- Loan and Security Agreement dated December 17, 1997 by
and among the Company, National Fuel & Energy, and OnSite
Technology, L.L.C. as Borrowers and Cahill, Warnock
Strategic Partners Fund, L.P., Strategic Associates,
L.P., Newpark Resources, Inc. and James H. Stone, as Lenders.
10.3* -- Form of Registration Rights Agreement pursuant to Private
Placement Memorandum dated September 18, 1996.
10.4* -- Form of Registration Rights Agreement dated December 17,
1997, between the Company and Cahill, Warnock Strategic
Partners Fund, L.P., Strategic Associates, L.P., Newpark
Resources, Inc. and James H. Stone.
10.5* -- Form of Warrant Agreement dated December 17, 1997,
between the Company and Cahill, Warnock Strategic
Partners Fund, L.P., Strategic Associates, L.P., Newpark
Resources, Inc. and James H. Stone.
10.6* -- Employment Agreement of James S. Percell.
10.7**** -- 1998 Stock Option Plan
21.1* -- Subsidiaries
- ---------------
* Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB as amended for the fiscal year ended December 31, 1997, and
incorporated by reference thereto.
** Previously filed as an exhibit to the Company's Current Report on Form
8-K dated December 17, 1997 and filed December 30, 1997, and
incorporated herein by reference thereto.
*** Previously filed with Form S-3 as amended effective Feb 8, 1999.
**** Previously filed as an exhibit to the Company's Annual Report on Form
10-KSB as amended for the fiscal year ended December 31, 1998, and
incorporated by reference thereto.
***** Previously filed as an exhibit to the Company's Current Report on Form
8-K dated August 17, 2000, and filed August 28, 2000, and incorporated
herein by reference thereto.
****** Previously filed as an exhibit to the Company's Current Report on Form
8-K dated March 1, 2001, and filed March 6, 2001, and incorporated
herein by reference thereto.
( C ) REPORTS ON FORM 8-K
On October 15, 2002 we filed a report on Form 8-K, which report included
information under item 5 " Other Events".
On October 16, 2002 we filed a report on Form 8-K, which report included
information under item 5 " Other Events ".
21
SIGNATURES
In accordance with the requirements of Section 13 of 15(d) of the Exchange
Act, the Registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, on April 10, 2003.
ENVIRONMENTAL SAFEGUARDS, INC.
By: /s/ JAMES S. PERCELL
--- ----------------
James S. Percell
Director, Chairman of the Board,
Chief Executive Officer and President
Pursuant to the requirements of the Exchange Act, this report has been
signed below by the following persons in the capacities and on the dates
indicated:
Signature Title Date
--------- ----- ----
/s/ JAMES S. PERCELL Director, Chairman of the Board, April 10, 2003
--- ---------------- Chief Executive Officer
and President
/s/ THOMAS R. BRAY Director April 10, 2003
--- --------------
/s/ BRYAN SHARP Director April 10, 2003
--- ----------
/s/ ALBERT WOLFORD Director April 10, 2003
--- -------------
/s/ DAVID L. WARNOCK Director April 10, 2003
--- ----------------
/s/ MICHAEL D. THOMPSON Chief Financial Officer April 10, 2003
--- ------------------- and Secretary
22
CERTIFICATIONS
I, James S. Percell, certify that:
1. I have reviewed this annual report on Form 10-K of Environmental
Sageguards, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 10, 200 By: /s/ James S. Percell
James S. Percell
Chief Executive Officer
23
I, Michael D. Thompson, certify that:
1. I have reviewed this annual report on Form 10-K of Environmental
Safeguards, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal controls
or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
Date: April 10, 2003 By: /s/ Michael D. Thompson
Michael D. Thompson
Chief Financial Officer
24
Certification of Chief Executive Officer of Environmental Safeguards, Inc.
- --------------------------------------------------------------------------
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of 18
- --------------------------------------------------------------------------------
U.S.C. 63.
- ----------
I, James S. Percell, the Chief Executive Officer of Environmental Safeguards,
Inc. hereby certify that Environmental Safeguards, Inc.'s annual report on Form
10-K and the financial statements contained therein fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934
(15 U.S.C. 78m or 78o(d) and that information contained in the annual report on
Form 10-K and the financial statements contained therein fairly represents, in
all material respects, the financial condition and results of the operations of
Environmental Safeguards, Inc.
Date: April 10, 2003 By: /s/ James S. Percell
James S. Percell
Chief Executive Officer
Certification of Chief Financial Officer of Environmental Safeguards, Inc.
- --------------------------------------------------------------------------
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of 18
- --------------------------------------------------------------------------------
U.S.C. 63.
- ----------
I, Michael D. Thompson, the Chief Financial Officer of Environmental Safeguards,
Inc. hereby certify that Environmental Safeguards, Inc.'s annual report on Form
10-K and the financial statements contained therein fully complies with the
requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934
(15 U.S.C. 78m or 78o(d) and that information contained in the annual report on
Form 10-K and the financial statements contained therein fairly represents, in
all material respects, the financial condition and results of the operations of
Environmental Safeguards, Inc.
Date: April 10, 2003 By: /s/ Michael D. Thompson
Michael D. Thompson
Chief Financial Officer
25
ENVIRONMENTAL SAFEGUARDS, INC.
__________
CONSOLIDATED FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000
ENVIRONMENTAL SAFEGUARDS, INC.
TABLE OF CONTENTS
__________
PAGE
----
Reports of Independent Accountants F-2
Audited Financial Statements
Consolidated Balance Sheet as of December 31,
2002 and 2001 F-4
Consolidated Statement of Operations for the
years ended December 31, 2002, 2001 and 2000 F-5
Consolidated Statement of Stockholders' Equity
for the years ended December 31, 2002, 2001
and 2000 F-6
Consolidated Statement of Cash Flows for the
years ended December 31, 2002, 2001 and 2000 F-7
Notes to Consolidated Financial Statements F-8
F - 1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Environmental Safeguards, Inc.
We have audited the accompanying consolidated balance sheet of Environmental
Safeguards, Inc. as of December 31, 2002 and the related consolidated statements
of operations, stockholders' deficit and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Environmental Safeguards, Inc. as of December 31, 2002, and the consolidated
results of its operations and its cash flows for the year then ended, in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Ham, Langston & Brezina, L.L.P.
Houston, Texas
March 20, 2003
F - 2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
Environmental Safeguards, Inc.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of operations, stockholders' equity and cash flows
present fairly, in all material respects, the financial position of
Environmental Safeguards, Inc. as of December 31, 2001, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended December 31, 2001 in conformity with accounting principles
generally accepted in the United States of America. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with auditing standards
generally accepted in the United States of America, which require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements included in the Company's Form 10-K for the
year ended December 31, 2001, the Company has incurred losses from operations
and has not generated sufficient business backlog. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
February 28, 2002
F - 3
ENVIRONMENTAL SAFEGUARDS, INC.
CONSOLIDATED BALANCE SHEET
__________
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
DECEMBER 31,
-------------------
ASSETS 2002 2001
------ --------- --------
Current assets:
Cash and cash equivalents $ 97 $ 798
Accounts receivable 97 1,309
Prepaid expenses 173 128
Other assets - 8
--------- --------
Total current assets 367 2,243
Property and equipment, net 5,506 6,539
Acquired engineering design and technology, net of
accumulated amortization of $1,756 and $1,348
as of December 31, 2002 and 2001, respectively 1,203 1,611
Other assets 3 3
--------- --------
Total assets $ 7,079 $10,396
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current liabilities:
Notes payable to related parties $ 250 $ -
Accounts payable 31 146
Dividends payable 617 364
Accrued interest 63 20
Other accrued liabilities 592 693
Income taxes payable - 254
--------- --------
Total current liabilities 1,553 1,477
--------- --------
Minority interest 1,943 2,040
Commitments and contingencies
Stockholders' equity:
Preferred stock; Series B convertible; voting,
$.001 par value (aggregate liquidation
value - $2,898) 5,000,000 shares authorized;
2,733,686 shares issued and outstanding 3 3
Preferred stock; Series D convertible, non-voting,
cumulative $.001 par value (aggregate liquidation
value $4,000); 400,000 shares authorized, issued
and outstanding 1 1
Common stock; $.001 par value; 50,000,000 shares
authorized; 10,112,144 shares issued and outstanding 10 10
Additional paid-in capital 14,981 14,981
Accumulated deficit (11,412) (8,116)
--------- --------
Total stockholders' equity 3,583 6,879
--------- --------
Total liabilities and stockholders' equity $ 7,079 $10,396
========= ========
The accompanying notes are an integral part
of these consolidated financial statements.
F - 4
ENVIRONMENTAL SAFEGUARDS, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
__________
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED DECEMBER 31,
----------------------------
2002 2001 2000
-------- -------- --------
Revenue $ 943 $ 2,987 $11,250
Cost of revenue 1,968 3,546 6,031
-------- -------- --------
Gross margin (1,025) (559) 5,219
Selling, general and administrative expenses 1,713 2,645 3,711
Amortization of acquired engineering design and
technology 408 408 408
Research and development 30 71 71
-------- -------- --------
Income (loss) from operations (3,176) (3,683) 1,029
Other income (expenses):
Gain on sale of equipment - 6,252 -
Interest income 2 32 28
Interest expense (43) (839) (1,018)
Other (2) 40 105
-------- -------- --------
Income (loss) before benefit (provision) for income
taxes and minority interest (3,219) 1,802 144
Benefit (provision) for income taxes 79 (536) (1,117)
-------- -------- --------
Income (loss) before minority interest (3,140) 1,266 (973)
Minority interest 97 241 (489)
-------- -------- --------
Net income (loss) $(3,043) $ 1,507 $(1,462)
======== ======== ========
Net income (loss) applicable to common stockholders $(3,296) $ 1,169 $(1,945)
======== ======== ========
Net income (loss) per share-basic $ (0.33) $ 0.12 $ (0.19)
======== ======== ========
Net income (loss) per share-diluted $ (0.33) $ 0.05 $ (0.19)
======== ======== ========
Weighted average shares outstanding-basic 10,112 10,112 10,112
======== ======== ========
Weighted average shares outstanding-diluted 10,112 23,142 10,112
======== ======== ========
The accompanying notes are an integral part
of these consolidated financial statements.
F - 5
ENVIRONMENTAL SAFEGUARDS, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
__________
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
SERIES B SERIES C SERIES D ADDITIONAL
PREFERRED PREFERRED PREFERRED COMMON PAID-IN ACCUMULATED
STOCK STOCK STOCK STOCK CAPITAL DEFICIT
---------- ----------- ---------- ----------- -------- -------------
Balance as of December 31, 1999 $ 3 $ 1 $ - $ 10 $ 14,329 $ (7,387)
Issuance of 417,066 warrants to purchase
common stock in connection with senior
secured debt - - - - 438 -
Issuance of Series D Preferred Stock in
exchange for Series C Preferred Stock - (1) 1 - 168 -
Dividends of $287 and $149 on Series C and
Series D Preferred Stock, respectively - - - - - (436)
Net loss - - - - - (1,462)
---------- ----------- ---------- ----------- -------- -------------
Balance as of December 31, 2000 3 - 1 10 14,935 (9,285)
Issuance of 188,571 warrants to pur-
chase common stock in connection
with senior secured debt (Note 4) - - - - 46 -
Dividends on Series D Preferred stock - - - - - (338)
Net income - _ - _ - _ -_ - _ 1,507
---------- ----------- ---------- ----------- -------- -------------
Balance as of December 31, 2001 3 - 1 10 14,981 (8,116)
Dividends on Series D Preferred stock - - - - - (253)
Net income - - - - - (3,043)
---------- ----------- ---------- ----------- -------- -------------
Balance as of December 31, 2002 $ 3 $ - $ 1 $ 10 $ 14,981 $ (11,412)
========== =========== ========== =========== ======== =============
TOTAL
STOCK-
HOLDERS'
EQUITY
----------
Balance as of December 31, 1999 $ 6,956
Issuance of 417,066 warrants to purchase
common stock in connection with senior
secured debt 438
Issuance of Series D Preferred Stock in
exchange for Series C Preferred Stock 168
Dividends of $287 and $149 on Series C and
Series D Preferred Stock, respectively (436)
Net loss (1,462)
----------
Balance as of December 31, 2000 5,664
Issuance of 188,571 warrants to pur-
chase common stock in connection
with senior secured debt (Note 4) 46
Dividends on Series D Preferred stock (338)
Net income 1,507
----------
Balance as of December 31, 2001 6,879
Dividends on Series D Preferred stock (253)
Net income (3,043)
----------
Balance as of December 31, 2002 $ 3,583
==========
The accompanying notes are an integral part
of these consolidated financial statements.
F - 6
ENVIRONMENTAL SAFEGUARDS, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
__________
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------
2002 2001 2000
-------- -------- --------
Cash flows from operating activities:
Net loss $(3,043) $ 1,507 $(1,462)
Adjustment to reconcile net loss to net cash
provided by (used in) operating activities:
Minority interest (97) (241) 489
Deferred tax expense - 30 3
Depreciation expense 1,218 2,080 2,245
Amortization of acquired engineering design
and technology 408 408 408
Amortization of discount - 344 372
Gain on sale of equipment - (6,252) -
Changes in operating assets and liabilities:
Accounts receivable 1,212 (286) 2,491
Prepaid expenses and other assets (37) (55) 88
Accounts payable (115) (10) (511)
Accrued liabilities (58) (195)
Income taxes payable (254) 34 (398)
-------- -------- --------
Net cash provided (used) by operating activities (766) (2,636) 3,962
-------- -------- --------
Cash flows from investing activities:
Proceeds from sale of equipment - 6,900 -
Purchases of equipment (185) (260) (274)
-------- -------- --------
Net cash provided (used) by investing activities (185) 6,640 (274)
-------- -------- --------
Cash flows from financing activities:
Proceeds from notes payable to stockholders 250 - -
Payments on long-term debt - (5,406) (1,081)
Dividends paid on Series C and Series D
preferred stock - (199) (312)
Distribution to minority interest - (669) (1,171)
-------- -------- --------
Net cash provided (used) by financing activities 250 (6,274) (2,564)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (701) (2,270) 1,124
Cash and cash equivalents, beginning of year 798 3,068 1,944
-------- -------- --------
Cash and cash equivalents, end of year $ 97 $ 798 $ 3,068
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest $ - $ 695 $ 476
======== ======== ========
Cash paid for income taxes $ - $ 472 $ 1,515
======== ======== ========
The accompanying notes are an integral part
of these consolidated financial statements.
F - 7
ENVIRONMENTAL SAFEGUARDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
__________
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------------
Environmental Safeguards, Inc. (the "Company") provides environmental
remediation and hydrocarbon reclamation/recycling services principally to
oil and gas companies, using proprietary Indirect Thermal Desorption
("ITD") technology. To date the primary service offered by the Company has
been the remediation of soil contaminated by oil-based drill cuttings and
the subsequent recovery of diesel and synthetic oils.
PRINCIPLES OF CONSOLIDATION
---------------------------
The consolidated financial statements include the accounts of the Company
and its majority owned or controlled subsidiaries after elimination of all
significant intercompany accounts and transactions.
MANAGEMENT ESTIMATES
--------------------
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities at the date of the financial statements
and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates. These estimates
mainly involve the useful lives of property and equipment, the valuation of
deferred tax assets and the realizability of accounts receivable.
RESEARCH AND DEVELOPMENT
------------------------
Research and development activities are expensed as incurred, including
costs relating to patents or rights which may result from such
expenditures.
REVENUE RECOGNITION
-------------------
Revenue is recognized at the time services are performed, or in the event
of the sale of an ITD unit, when the equipment is shipped.
CONCENTRATIONS OF CREDIT RISK
-----------------------------
Financial instruments which subject the Company to concentrations of credit
risk include cash and cash equivalents and accounts receivable. The Company
maintains its cash and cash equivalents with major financial institutions
selected based upon management's assessment of the banks' financial
stability. Balances periodically exceed the $100,000 federal depository
insurance limit. The Company has not experienced any losses on deposits.
Accounts receivable generally arise from sales of services to customers
operating in the United States and Latin America. Collateral is generally
not required for credit granted. As of December 31, 2002 and 2001, all of
the Company's trade receivables were due from two customers for services
performed in the United States and Mexico. The Company has in place
insurance to cover certain exposure in its foreign operations and provides
allowances for potential credit losses when necessary.
F - 8
ENVIRONMENTAL SAFEGUARDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
__________
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
-----------------------------------------------------------
CASH EQUIVALENTS
----------------
The Company considers all short-term investments with an original maturity
of three months or less when purchased to be cash equivalents.
PROPERTY AND EQUIPMENT
----------------------
Property and equipment is stated at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of 8 years for ITD
Units and 3 to 5 years for office furniture and equipment and
transportation and other equipment. Effective October 1, 2002, the Company
changed the estimated useful lives of ITD units from 5 to 8 years to more
accurately reflect the Company's experience with useful lives of ITD unites
(See Note 3). Additions or improvements that increase the value or extend
the life of an asset are capitalized. Expenditures for normal maintenance
and repairs are expensed as incurred. Disposals are removed from the
accounts at cost less accumulated depreciation and any gain or loss from
disposition is reflected in operations currently.
INCOME TAXES
------------
The Company uses the liability method in accounting for income taxes. Under
this method, deferred tax assets and liabilities are determined based on
differences between financial reporting and income tax carrying amounts of
assets and liabilities and are measured using the enacted tax rates and
laws that will be in effect when the differences are expected to reverse. A
valuation allowance, if necessary, is provided against deferred tax assets,
based upon management's assessment as to their realization.
STOCK-BASED COMPENSATION
------------------------
Financial Accounting Standard No. 123, "Accounting for Stock-Based
Compensation" ("SFAS No. 123") established financial accounting and
reporting standards for stock-based employee compensation plans. It defined
a fair value based method of accounting for an employee stock option or
similar equity instrument and encouraged all entities to adopt that method
of accounting for all of their employee stock compensation plans and
include the cost in the income statement as compensation expense. However,
it also allows an entity to continue to measure compensation cost for those
plans using the intrinsic value based method of accounting prescribed by
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock
Issued to Employees". The Company accounts for compensation cost for stock
option plans in accordance with APB Opinion No. 25.
ACQUIRED ENGINEERING DESIGN AND TECHNOLOGY
------------------------------------------
Acquired engineering design and technology represents the intangible value
associated with certain proprietary equipment and process designs acquired
by the Company in the acquisition of OnSite Technology, L.L.C. ("OnSite")
in 1997. In the acquisition of OnSite, the purchase price was allocated to
the assets acquired and liabilities assumed based on independent appraisal.
This intangible asset is being amortized over an estimated useful life of 8
years using the straight-line method.
F - 9
ENVIRONMENTAL SAFEGUARDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
__________
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
-----------------------------------------------------------
IMPAIRMENT OF LONG-LIVED ASSETS
-------------------------------
In the event facts and circumstances indicate the carrying value of a
long-lived asset, including associated intangibles, may be impaired, an
evaluation of recoverability is performed by comparing the estimated future
undiscounted cash flows associated with the asset to the asset's carrying
amount to determine if a write-down to market value or discounted cash flow
is required. Given the homogeneous nature and geographic deployment
flexibility of such assets, and based upon a recent evaluation by
management, an impairment write-down of the Company's long-lived assets was
not deemed necessary.
Management has evaluated the carrying value of long-lived assets, including
associated intangibles. An evaluation of recoverability is performed by
comparing the estimated future undiscounted cash flows associated with the
asset to the asset's carrying amount to determine if a write-down to market
value or discounted cash flow is required. Given the homogeneous nature and
geographic deployment flexibility of such assets, and based upon this
evaluation by management, impairment of the Company's long-lived assets has
not been deemed necessary.
TRANSLATION OF FOREIGN CURRENCIES
---------------------------------
The financial statements of foreign subsidiaries are measured as if the
functional currency were the U.S. dollar. The remeasurement of local
currencies into U.S. dollars creates translation adjustments which are
included in net income.
FAIR VALUE OF FINANCIAL INSTRUMENTS
-----------------------------------
The Company includes fair value information in the notes to financial
statements when the fair value of its financial instruments is different
from the book value. When the book value approximates fair value, no
additional disclosure is made.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
-----------------------------------------
In July 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," which requires all business combinations initiated after
June 30, 2001 be accounted for using the purchase method. In addition, SFAS
No. 141 further clarifies the criteria to recognize intangible assets
separately from goodwill. Specifically, SFAS No. 141 requires that an
intangible asset may be separately recognized only if such an asset meets
the contractual-legal criterion or the separability criterion. The
implementation of SFAS No. 141 did not have a material impact on the
Company's results of operations or financial position.
F - 10
ENVIRONMENTAL SAFEGUARDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
__________
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
-----------------------------------------------------------
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS, CONTINUED
----------------------------------------------------
In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets," under which goodwill and intangible assets with indefinite useful
lives are no longer amortized but will be reviewed for impairment annually,
or more frequently if certain events or changes in circumstances indicate
that the carrying value may not be recoverable. The impairment test for
goodwill involves a two-step process: step one consists of a comparison of
the fair value of a reporting unit with its carrying amount, including the
goodwill allocated to each reporting unit. If the carrying amount is in
excess of the fair value, step two requires the comparison of the implied
fair value of the reporting unit goodwill with the carrying amount of the
reporting unit goodwill. Any excess of the carrying value of the reporting
unit goodwill over the implied fair value of the reporting unit goodwill
will be recorded as an impairment loss. The impairment test for intangible
assets with indefinite useful lives consists of a comparison of fair value
to carrying value, with any excess of carrying value over fair value being
recorded as an impairment loss. Intangible assets with finite useful lives
will continue to be amortized over their useful lives and will be reviewed
for impairment in accordance with SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." The implementation of SFAS
No. 142 at did not have a material impact on the Company's results of
operations or financial position.
In August 2001, the FASB issued SFAS No. 144, which supercedes SFAS No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of," and certain provisions of APB Opinion No. 30,
"Reporting the Results of Operations - Reporting the Effects of Disposal of
a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions." SFAS No. 144 retains the fundamental
provisions of SFAS No. 121 related to: (i) the recognition and measurement
of the impairment of long-lived assets to be held and used, and (ii) the
measurement of long-lived assets to be disposed by sale. It provides more
guidance on estimating cash flows when performing recoverability tests,
requires long-lived assets to be disposed of other than by sale to be
classified as held and used until disposal, and establishes more
restrictive criteria to classify long-lived assets as held for sale. In
addition, SFAS No. 144 supersedes the accounting and reporting provisions
of APB Opinion No. 30 for the disposal of a segment of a business. However,
it retains the basic provisions of APB Opinion No. 30 to report
discontinued operations separately from continuing operations and extends
the reporting of a discontinued operation to a component of an entity. The
implementation of SFAS No. 144 did not have a material impact on the
Company's results of operations or financial position.
F - 11
ENVIRONMENTAL SAFEGUARDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
__________
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES, CONTINUED
-----------------------------------------------------------
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS, CONTINUED
----------------------------------------------------
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which addresses financial
accounting and reporting for costs associated with exit or disposal
activities and supersedes Emerging Issues Task Force ("EITF") Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and
Other Costs to Exit an Activity (including Certain Costs Incurred in a
Restructuring)." SFAS No. 146 requires companies to recognize costs
associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. In addition,
SFAS No. 146 establishes that fair value is the objective for initial
measurement of the liability. SFAS No. 146 is effective for exit or
disposal activities initiated after December 31, 2002, but early adoption
is permitted. The Company is currently evaluating the adoption date;
however the impact of its adoption is not expected to have a significant
impact on the Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock Based
Compensation", which amends SFAS No. 123 to provide alternative methods of
transition for an entity that voluntarily changes to the fair value method
of accounting for stock based employee compensation. It also amends the
disclosure provisions of SFAS No. 123 to require prominent disclosure about
the effects on reported net income of an entity's accounting policy
decisions with respect to stock based employee compensation. Finally, SFAS
No. 148 amends APB Opinion No. 28, "Interim Financial Reporting", to
require disclosure of those effects in interim financial statements. SFAS
No. 148 is effective for fiscal years ended after December 15, 2002, but
early adoption is permitted. The Company will adopt SFAS No. 148 on January
1, 2003; however, the Company does not expect that adoption will have a
significant impact on its financial reporting.
2. LIQUIDITY ISSUES
----------------
During the year ended December 31, 2002 and 2001, the Company faced
significant liquidity issues that caused the Company's prior independent
accountants to include an explanatory paragraph in their auditor's report
on the Company's consolidated financial statements, as of December 31, 2001
and for the two years in the period then ended, describing the uncertainty
about the Company's ability to continue as a going concern. Below is an
analysis of the circumstances that led to a going concern explanatory
paragraph in the Company's 2001 financial statements, followed by a
description of changes in circumstances that resulted in the current
auditors issuing an unqualified opinion, without a going concern
explanatory paragraph, on the Company's 2002 financial statements.
BACKGROUND AND 2001 CIRCUMSTANCES
Since its inception, the Company has expended a significant portion of its
resources to develop markets and industry awareness of the capabilities of
its indirect thermal desorption recycling process. The Company's efforts
have been focused on the development, production and sale of environmental
recycling technologies and services to oil and gas industry participants,
waste management companies and other industrial customers. The Company's
efforts to develop markets and produce equipment have required significant
amounts of capital including long-term debt secured by the Company's ITD
units and related ITD
F - 12
ENVIRONMENTAL SAFEGUARDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
__________
2. LIQUIDITY ISSUES
-----------------
BACKGROUND AND 2001 CIRCUMSTANCES
technology. With the exception of the profitability impact from the
Company's sale of three ITD units and certain licensing rights in late 2001
(as noted below and in Note 3), the Company has incurred recurring net
losses and has been dependent on revenue from a limited customer base to
provide cash flows. These factors were the basis for the Company's
predecessor auditor's conclusion that at December 31, 2001, substantial
doubt existed about the Company's ability to continue as a going concern.
The Company is continually seeking to obtain service contracts in the
markets that it serves. In December 2001, the Company completed the sale of
three of its ITD units and certain licensing rights, and the proceeds were
used to pay off all the Company's senior debt.
At December 31, 2001, the Company's predecessor auditor believed that the
Company's long-term viability as a going concern was dependent on the
repositioning of its asset base and the achievement of a sustaining level
of profitability. To the extent the Company's cash reserves and future cash
flows from operations were insufficient to meet future cash requirements,
the Company would need to raise funds through the infusion of equity, the
issuance of debt securities or the sale of ITD units. Doubt existed as to
whether such financing would be available on terms acceptable to the
Company or at all. Further, the sale of additional equity or convertible
debt securities may result in dilution to the Company's stockholders. The
accompanying financial statements do not include any adjustments that might
be necessary if the Company is unable to continue as a going concern.
NEW DEVELOPMENTS SUBSEQUENT TO DECEMBER 31, 2002
In January and March 2003, the Company entered into two important
agreements that management believes will provide cash resources sufficient
to cover the Company's 2003 cash requirements. The first agreement is a
processing contract with a major waste management and disposal contractor
for services at a facility in Arkansas. The second agreement is a
$1,500,000 long-term financing arrangement collateralized by certain of the
Company's ITD units. (See Note 14)
OTHER
Management has evaluated the carrying value of long-lived assets, including
associated intangibles. An evaluation of recoverability is performed by
comparing the estimated future undiscounted cash flows associated with the
assets to their carrying amount to determine if a write-down to market
value or discounted cash flow is required. Given the homogeneous nature and
geographic deployment flexibility of such assets, and based upon this
evaluation by management, impairment of the Company's long-lived assets has
not been deemed necessary.
F - 13
ENVIRONMENTAL SAFEGUARDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
__________
3. PROPERTY AND EQUIPMENT
----------------------
Property and equipment consists of the following:
2002 2001
------- -------
(IN THOUSANDS)
ITD Remediation/Recycling Units and
auxiliary equipment $11,962 $11,777
Office furniture and equipment 36 36
Transportation and other equipment 49 49
------- -------
12,047 11,862
Less accumulated depreciation 6,541 5,323
------- -------
Property and equipment, net $ 5,506 $ 6,539
======= =======
On October 1, 2002, the Company changed the depreciable lives of its ITD
units from five to eight years. This change in estimate was made to more
accurately reflect the Company's experience concerning the useful life of
its equipment and to conform with industry practices for similar equipment.
The change in estimate, which is being applied on a prospective basis,
resulted in a decrease in depreciation expense and net loss of $215,000 for
the year ended December 31, 2002. The change reduced basic and diluted loss
per share by $0.02 and, accordingly, if the change in estimate had not been
adopted by the Company, basic and diluted net loss per share for the year
ended December 31, 2002 would have been $0.35 per share.
On August 23, 2001, the Company entered into a contract to sell three of
its used ITD units to a customer in Mexico. The total sales price for the
ITD units was $6,900,000 and the Company recognized a gain on the sale of
$6,252,000, which is presented in other income in the accompanying
statement of operations. In connection with the sale, the Company granted
its customer in Mexico an exclusive license for, and right to use, ITD
technology in Mexico (subject to an existing agreement) and an option to
acquire a fourth ITD unit from the Company.
4. NOTES PAYABLE TO RELATED PARTIES
--------------------------------
In July 2002, the Company obtained uncollateralized loans totaling $250,000
from Cahill Warnock Strategic Partners, L.P. and Strategic Associates, L.P.
These loans bear interest of 12% per year and were originally due in
January 2003 but have been extended to September 2003. David Warnock, a
director of the Company, is a general partner of Cahill Warnock Strategic
Partners, L.P. and a managing member of the general partner of Strategic
Associates, L.P.
F - 14
ENVIRONMENTAL SAFEGUARDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
__________
5. OTHER ACCRUED LIABILITIES
-------------------------
Other accrued liabilities consists of the following:
2002 2001
----- -----
(IN THOUSANDS)
Accrued warranty reserve $ - $ 146
Accrued property and franchise taxes 15 76
Accrued professional fees 40 85
Accrued joint-company expenses 332 259
Accrued foreign VAT and withholding taxes - 42
Accrued capital improvements 80 -
Accrued executive salaries 116 -
Accrued operating costs 9 85
----- -----
$ 592 $ 693
===== =====
6. LEASE COMMITMENTS
-----------------
The Company leases office space and a storage and maintenance area for its
equipment under operating leases. The leases have a remaining term of less
than one year. Management intends to replace these leases in the normal
course of business. Rental expense under operating leases was $52,000,
$100,000 and $115,000 during the years ended December 31, 2002, 2001 and
2000, respectively.
7. INCOME TAXES
------------
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
were as follows:
2002 2001
-------- --------
(IN THOUSANDS)
Deferred tax liabilities:
Basis of property and equipment $ 150 $ 315
-------- --------
Total deferred tax liabilities 150 315
-------- --------
Deferred tax assets:
Net operating loss carryforwards 2,040 1,170
Undistributed foreign losses - 352
All other, net 340 452
-------- --------
Total deferred tax assets 2,380 1,974
-------- --------
Valuation allowance (2,230) (1,659)
-------- --------
150 315
-------- --------
Net deferred tax assets $ - $ -
======== ========
F - 15
ENVIRONMENTAL SAFEGUARDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
__________
7. INCOME TAXES, CONTINUED
-----------------------
For financial reporting purposes, income before provision for income taxes
and minority interest includes the following components:
2002 2001 2000
-------- -------- --------
(IN THOUSANDS)
United States $(2,931) $ 4,839 $(1,066)
Foreign (288) (3,037) 1,210
-------- -------- --------
Income (loss) before provision for income
taxes and minority interest $(3,219) $ 1,802 $ 144
======== ======== ========
Significant components of the benefit (provision) for income taxes are as
follows:
2002 2001 2000
----- ------ --------
(IN THOUSANDS)
Current:
Federal $ 79 $(247) $ -
Foreign - (259) (1,110)
----- ------ --------
Total current 79 (506) (1,110)
----- ------ --------
Deferred:
Federal - - -
Foreign - (30) (7)
----- ------ --------
Total deferred - (30) (7)
----- ------ --------
Benefit (provision) for income taxes $ 79 $(536) $(1,117)
===== ====== ========
The differences between the statutory income tax rate and the Company's
effective income tax rate are as follows:
2002 2001 2000
----- ----- -------
Federal statutory rate 34% (34%) (34%)
State income taxes - (9%) -
Foreign income taxes - (10%) (776%)
Foreign tax credits and other (16%) (38%) -
Change in valuation allowance (18%) 61% 34%
----- ----- -------
Benefit (provision) for income taxes 2% (30%) (776%)
===== ===== =======
F - 16
ENVIRONMENTAL SAFEGUARDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
__________
7. INCOME TAXES, CONTINUED
-----------------------
As of December 31, 2002, for U.S. federal income tax reporting purposes,
the Company has approximately $6,000,000 of unused net operating losses
("NOLs") available for carryforward to future years. The benefit from
carryforward of such NOLs will expire during the years ended December 31,
2003 to 2022. Because United States tax laws limit the time during which
NOL carryforwards may be applied against future taxable income, the Company
may be unable to take full advantage of its NOL for federal income tax
purposes should the Company generate taxable income. Based on such
limitation, the Company has significant NOL carryforwards for which
realization of tax benefits is uncertain. Further, the benefit from
utilization of NOL carryforwards could be subject to limitations if
material ownership changes occur in the Company. Based on such limitations,
the Company has significant NOL's for which realization of tax benefits is
uncertain.
8. STOCKHOLDERS' EQUITY
--------------------
The Company's articles of incorporation authorize the issuance of up to
10,000,000 shares of preferred stock with characteristics determined by the
Company's board of directors. Effective December 17, 1997, the board of
directors authorized the issuance and sale of up to 5,000,000 shares of
Series B convertible preferred stock and up to 400,000 shares of Series C
non-voting non-convertible preferred stock. During the year ended December
31, 2000, the board of directors authorized the issuance of up to 400,000
shares of Series D convertible preferred stock.
SERIES B CONVERTIBLE PREFERRED STOCK
------------------------------------
In 1997, the Company issued 3,771,422 shares of $0.001 par value Series B
convertible preferred stock for $4,000,000, or $1.06 per share. Dividends
are paid at the same rate as common stock based upon the conversion rate.
The Series B convertible preferred stock can be converted to common stock
at any time at the option of the holder. The initial rate is 1 common share
for each preferred share; however, the conversion rate is subject to
adjustments to prevent dilution. The holders of the Series B convertible
preferred stock have essentially the same voting rights as the holders of
common stock. The Series B convertible preferred stock has a liquidation
preference of $1.06 per share plus any unpaid dividends.
SERIES C PREFERRED STOCK
------------------------
In 1997, the Company issued 400,000 shares of Series C non-voting preferred
stock with a $0.001 per share par value and a $10 per share stated value.
The Series C preferred stock carried a quarterly dividend payable in
arrears of prime plus 1.5% based on the stated value of the stock. The
Series C preferred stock was redeemable at the option of the Company at a
price of $10 per share plus any unpaid dividends. Proceeds of $4,000,000
from the Series C preferred stock were recorded net of a discount of
$809,000, which included related offering costs incurred and the allocation
of a portion of the proceeds to the warrants issued to the same investors.
The Series C preferred stock was accreted to its liquidation value over a
period of 26 months to February 17, 2000. The accretion of the Series C
preferred stock was deducted from the net loss to derive the net loss
applicable to common stockholders in the calculation of earnings per share
(See Note 9). As described below, during 2000, Series C preferred stock was
exchanged for Series D convertible preferred stock.
F - 17
ENVIRONMENTAL SAFEGUARDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
__________
8. STOCKHOLDERS' EQUITY, CONTINUED
-------------------------------
SERIES D PREFERRED STOCK
------------------------
During 2000, the Company exchanged 400,000 newly issued shares of Series D
convertible Preferred Stock for Series C non-convertible Preferred Stock
held by the Company's primary lender. The newly issued shares of Series D
Preferred stock are convertible into common stock at a conversion price of
$2.25 per share until December 31, 2002, and a conversion price of $1.00
after December 31, 2002.
In the event of a default under the loan agreement, the conversion price
was originally the lesser of $1.00 per share or the averaging thirty-day
trailing price; however, in March 2001, the conversion price was fixed at
$0.37. The conversion feature associated with the 400,000 shares of Series
D Preferred Stock was valued at $168,000 based on an independent appraisal.
The value of the conversion feature, representing unaccreted discount, was
amortized to expense over the remaining term of the debt using the
effective interest method. Other than the conversion feature of the Series
D Preferred Stock, its features and preferences are the same as the Series
C Preferred Stock.
STOCK OPTIONS
-------------
The Company periodically issues incentive stock options to key employees,
officers, and directors to provide additional incentives to promote the
success of the Company's business and to enhance the ability to attract and
retain the services of qualified persons. The issuance of such options are
approved by the Board of Directors. The exercise price of an option granted
is determined by the fair market value of the stock on the date of grant.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
FASB Statement No. 123, "Accounting for Stock-Based Compensation", requires
use of option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options is greater than or equals the market price
of the underlying stock on the date of grant, no compensation expense has
been recognized.
Proforma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
that Statement. The fair value for these options was estimated at the date
of grant using a Black-Scholes option pricing model. No options were
granted in 2002, 2001 or 2000 and, accordingly, no option pricing
assumptions are presented.
The Black-Scholes option valuation model was developed for use in
estimating fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require
the input of highly subjective assumptions including the expected stock
price volatility. Because the Company's employee stock options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of its
employee stock options.
F - 18
ENVIRONMENTAL SAFEGUARDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
__________
8. STOCKHOLDERS' EQUITY, CONTINUED
-------------------------------
STOCK OPTION PLAN
-----------------
The Company has adopted the 1998 Stock Option Plan (the "Option Plan")
under which incentive stock options for up to 800,000 shares of the
Company's common stock may be awarded to officers, directors and key
employees. The Option Plan is designed to attract and reward key executive
personnel. At December 31, 1999, the Company had granted options for
610,000 of a total of 800,000 shares of common stock reserved for issuance
under the Option Plan. During 2000, 62,500 options were forfeited resulting
in a 547,500 of a total of 800,000 share of common stock reserved for the
issuance under the Option Plan.
Stock options granted pursuant to the Option Plan expire not more than ten
years from the date of grant and typically vest over two years, with 50%
vesting after one year and 50% vesting in the succeeding year. All of the
options granted by the Company were granted at an option price equal to the
fair market value of the common stock at the date of grant.
PROFORMA DISCLOSURES
--------------------
For purposes of proforma disclosures, the estimated fair value of the
options is included in expense over the option's vesting period or expected
life.
During the year ended December 31, 1999, 626,730 of the Company's stock
options were repriced from original exercise prices ranging from $2.50 to
$5.00 per share to a new exercise price of $1.44 per share. The new
exercise price was based on the quoted market value of the Company's common
stock at the date of repricing. The repricing of options significantly
impacted proforma financial information in 1999. The Company's proforma
information follows:
2002 2001 2000
-------- ------ --------
(IN THOUSANDS, EXCEPT
PER SHARE AMOUNTS)
Proforma net income (loss) $(3,043) $1,507 $(1,637)
Proforma net income (loss) available
to common stockholders $(3,296) $1,169 $(2,120)
Proforma basic income (loss) per share $ (0.33) $ 0.12 $ (0.20)
Dilutive income (loss) per share $ (0.33) $ 0.05 $ (0.20)
A summary of the Company's stock option activity and related information
for the years ended December 31, 2002, 2001 and 2000 follows:
NUMBER OF
SHARES
UNDER WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
---------- -----------------
Outstanding - December 31, 1999 4,851,162 1.38
Granted - -
Exercised - -
Forfeited during 2000 (62,500) 1.69
----------
Outstanding - December 31, 2002, 2001
and 2000 4,788,662 $ 1.38
==========
F - 19
ENVIRONMENTAL SAFEGUARDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
__________
8. STOCKHOLDERS' EQUITY, CONTINUED
-------------------------------
PROFORMA DISCLOSURES, CONTINUED
-------------------------------
No options were granted during the years ended December 31, 2002 or 2001. A
summary of outstanding stock options at December 31, 2002, follows:
REMAINING
NUMBER OF COMMON CONTRACTUAL
STOCK EQUIVALENTS EXPIRATION DATE LIFE (YEARS) EXERCISE PRICE
----------------- --------------- ------------ ---------------
2,470,300 November 2005 2.9 $ 0.60
112,500 March 2007 4.2 1.44
480,000 March 2007 4.2 2.50
35,000 November 2007 4.9 1.44
356,813 December 2007 5.0 1.44
613,831 December 2007 5.0 3.00
1,053 January 2008 5.1 2.38
800 January 2008 5.1 3.12
770 January 2008 5.1 3.25
625 January 2008 5.1 4.00
47,053 April 2008 5.7 5.00
122,417 April 2008 5.7 1.44
547,500 December 2008 6.0 1.69
-----------------
4,788,662
=================
All outstanding stock options are exercisable at December 31, 2002, 2001
and 2000.
STOCK WARRANTS
--------------
Following is a summary of stock warrant activity:
NUMBER OF EXERCISE WEIGHTED
SHARES PRICE AVERAGE PRICE
--------- --------- --------------
Warrants outstanding as of
December 31, 1999 707,143 $ 0.01 $ 0.01
Issued 417,066 $ 0.01 $ 0.01
Canceled - - -
Exercised - - -
---------
Warrants outstanding as of
December 31, 2000 1,124,209 $ 0.01 $ 0.01
Issued 188,571 $ 0.01 $ 0.01
Canceled - - -
Exercised - - -
---------
Warrants outstanding as of
December 31, 2001 1,312,780 $ 0.01 $ 0.01
Issued - - -
Canceled - - -
Exercised - - -
---------
Warrants outstanding as of
December 31, 2002 1,312,780 $ 0.01 $ 0.01
=========
F - 20
ENVIRONMENTAL SAFEGUARDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
__________
8. STOCKHOLDERS' EQUITY, CONTINUED
-------------------------------
All warrants outstanding were issued in connection with the funding of
certain notes payable that were repaid in 2001. All warrants bear an
exercise price of $0.01 per share, are currently exercisable, and expire in
December 2007.
9. EARNINGS PER SHARE
------------------
Basic earnings per common share are based on the weighted average number of
common shares outstanding in each year and after preferred stock dividend
requirements. Diluted earnings per common share assume that any dilutive
convertible debentures and convertible preferred shares outstanding at the
beginning of each year were converted at those dates, with related
interest, preferred stock dividend requirements and outstanding common
shares adjusted accordingly. It also assumes that outstanding common shares
were increased by shares issuable upon exercise of those stock options for
which market price exceeds exercise price, less shares which could have
been purchased by the Company with related proceeds. The convertible
preferred stock and outstanding stock options and warrants were not
included in the computation of diluted earnings per common share for 2002
or 2000 since their effect was antidilutive.
The following table sets forth the computation of basic and diluted
earnings per share:
2002 2001 2000
-------- -------- --------
(IN THOUSANDS)
Numerator:
Net income (loss) $(3,043) $ 1,507 $(1,462)
Less: Series C and D Preferred stock
dividends ($0.63, $0.85 and $1.09
per share) in 2001, 2000 and 1999,
respectively (253) (338) (436)
Accretion of discount on Series C
preferred stock (Note 8) - - (47)
-------- -------- --------
Net income (loss) applicable to common
stockholders-numerator for basic and
diluted earnings per share $(3,296) $ 1,169 $(1,945)
======== ======== ========
Denominator:
Denominator for basic earnings per share-
weighted average shares 10,112 10,112 10,112
Effect of dilutive securities:
Warrants - 1,069 -
Convertible Series B preferred stock - 2,734 -
Convertible Series D preferred stock - 9,227 -
-------- -------- --------
Dilutive potential common shares - 13,030 - _
-------- -------- --------
Denominator for diluted earnings per
share-adjusted weighted average shares
and assumed conversions 10,112 23,142 10,112
======== ======== ========
Basic earnings per share $ (0.33) $ 0.12 $ (0.19)
======== ======== ========
Diluted earnings per share $ (0.33) $ 0.05 $ (0.19)
======== ======== ========
F - 21
ENVIRONMENTAL SAFEGUARDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
__________
9. EARNINGS PER SHARE, CONTINUED
-----------------------------
The following table sets forth the computation of basic and diluted
earnings per share:
2002 2001 2000
-------- ------- --------
(IN THOUSANDS)
Numerator:
Net income (loss) $(3,043) $1,507 $(1,462)
Less: Series C and D Preferred stock
dividends ($0.63, $0.85 and $1.09
per share) in 2001, 2000 and 1999,
respectively (253) (338) (436)
Accretion of discount on Series C
preferred stock (Note 8) - - (47)
-------- ------- --------
Net income (loss) applicable to common
stockholders-numerator for basic and
diluted earnings per share $(3,296) $1,169 $(1,945)
======== ======= ========
10. 401(K) SALARY DEFERRAL PLAN
---------------------------
The Company has a 401(k) salary deferral plan (the "Plan") which became
effective on January 1, 1998, for eligible employees who have met certain
service requirements. The Plan does not provide for Company matching or
discretionary contributions and, accordingly, the Company recognized no
expense under the Plan in 2002, 2001 or 2000.
11. LITIGATION
----------
In July 2002, OnSite filed a lawsuit styled OnSite Technology LLC v.
Duratherm, Inc., Duratherm Group, Inc., Steven R. Heuer and Victor R.
Reynolds; Civil Action No. H-02-2624; In the United States District Court
for the Southern District of Texas against Duratherm, Inc. and Duratherm
Group, Inc., Steven R. Heuer and Victor R. Reynolds. OnSite's lawsuit
alleges that Duratherm's remediation operations at its Galveston County,
Texas facility infringed on OnSite's U.S. Patent No. 5,738,031 and
requested a declaratory judgment that OnSite's operation of its remediation
process does not infringe either of Heuer and Reynolds' U.S. Patent Nos.
4,990,237 and 5,269,906 over which Duratherm alleges control. The
Defendants have filed an answer asserting that they do not infringe on
OnSite's patent and that such patent is invalid. Defendants also deny there
is any controversy between the parties regarding the Heuer and Reynolds'
patents. This case is in the early stages of discovery.
F - 22
ENVIRONMENTAL SAFEGUARDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
__________
11. LITIGATION, CONTINUED
---------------------
In July 2002, OnSite also initiated litigation styled OnSite Technology,
LLC v. Duratherm, Inc. et al.; Cause No. 02CV0801; In the 56th Judicial
District Court of Galveston County, Texas, against Duratherm, Inc.,
Duratherm Group, Inc., Barry Hogan and Jim Hogan. This lawsuit alleges that
in November 1999, OnSite and Waste Control Specialists, L.L.C. ("WCS")
entered into a contract wherein OnSite would, among other things, provide
the necessary services, supplies and equipment to perform recycling and
remediation services utilizing an indirect thermal desorption unit as
specified therein. On information and belief, in late July or early August
2000, Defendants, acting in concert through Duratherm, Inc., sent or caused
to be sent a letter(s) and/or other communication(s) to WCS, which OnSite
alleges contained statements that were false and intended to deceive WCS,
as to OnSite and OnSite's technology and indirect thermal desorption unit.
As a result of such false, deceptive and malicious statements, WCS
terminated its contract with OnSite. In August 2000, Duratherm, Inc. filed
suit against OnSite and WCS in the United States District Court for the
Southern District of Texas under Civil Action No. H-00-2727, which suit was
subsequently dismissed with prejudice by the United States District Judge.
OnSite alleges that such suit was malicious and contained false statements
and allegations about OnSite and OnSite's technology and indirect thermal
desorption unit. In February 2003 OnSite amended its petition to add John
C. Hilliard as a defendant and to add as a claim against the defendants,
the loss of a prospective contract with ExxonMobil. OnSite has also amended
its petition to include as a defendant Duratherm's counsel, Conley Rose
P.C. (for purposes of injunctive relief). The causes of action alleged by
OnSite against the Defendants are (i) interference with contract; (ii)
unfair competition and business disparagement; (iii) unjust enrichment; and
(iv) injury to OnSite's business reputation. OnSite is seeking actual,
consequential, incidental and compensatory damages, including, but not
limited to, disgorgement, pre- and post-judgment interest, attorney's fees
and costs and exemplary and punitive damages. OnSite is also seeking to
enjoin these defendants and Duratherm's counsel, Conley Rose P.C., from
interfering with the current and prospective business relationships of
OnSite with regard to the thermal desorption units. The Defendants in this
litigation, other than John C. Hilliard and Conley Rose P.C., have filed an
answer denying the allegations contained in OnSite's petition. The answers
from John C. Hilliard and Conley Rose P.C. are not yet due as of March 26,
2003. This case is in the early stages of discovery.
The Company is from time to time involved in other litigation incidental to
its business, which at times involves claims for significant monetary
amounts, some of which would not be covered by insurance. Presently the
Company has no existing litigation.
12. RELATED PARTY TRANSACTIONS
--------------------------
In July 2002, the Company obtained uncollateralized loans totaling $250,000
from certain stockholders (See Note 4). In March 2001 and September 2000,
the Company entered into agreements with its primary lenders and holders of
its outstanding preferred stock to defer various principal and interest
payments on its senior debt. The senior debt was fully repaid in December
2001.
F - 23
ENVIRONMENTAL SAFEGUARDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
__________
12. RELATED PARTY TRANSACTIONS, CONTINUED
-------------------------------------
During 1998, the Company entered into a marketing assistance agreement (the
"Marketing Agreement") with the minority owners of OnSite Colombia, Inc.
Under the terms of the Marketing Agreement, in exchange for assisting the
Company in its business expansion efforts, the minority owners and the
Company each received marketing assistance fees totaling $320,000 during
the year ended December 31, 2000.
13. SEGMENT, GEOGRAPHIC AND MAJOR CUSTOMERS INFORMATION
---------------------------------------------------
The Company currently operates in the environmental remediation and
hydrocarbon reclamation/recycling services. Substantially all revenues
result from the sale of services using the Company's ITD units. The
Company's reportable segments are based upon geographic area and all
intercompany revenue and expenses are eliminated in computing revenues and
operating income (loss).
During 2000 a significant portion of the Company's foreign operations were
conducted by the Company's 50% owned joint company in Colombia. All foreign
subsidiaries of the Company operate with the U.S. dollar as their
functional currency and, accordingly, no cumulative translation adjustment
is presented in the accompanying balance sheet.
The Company and OnSite share office facilities and certain employees.
Shared costs are generally specifically identified by company; however,
certain costs must be allocated based upon management's estimates.
The corporate component of operating income (loss) represents corporate
general and administrative expenses. Corporate assets include cash and cash
equivalents, and restricted cash investments.
Following is a summary of segment information:
2002 2001 2000
------ ------ -------
(IN THOUSANDS)
Revenue:
United States $ 49 $ 140 $ 1,464
United Kingdom - - 52
Latin America 894 2,847 9,734
------ ------ -------
Total revenue $ 943 $2,987 $11,250
====== ====== =======
Depreciation and Amortization:
United States $1,624 $1,810 $ 1,566
United Kingdom - 259 253
Latin America - 419 834
------ ------ -------
Total depreciation and amortization $1,624 $2,488 $ 2,653
====== ====== =======
F - 24
ENVIRONMENTAL SAFEGUARDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
__________
13. SEGMENT, GEOGRAPHIC AND MAJOR CUSTOMER INFORMATION, CONTINUED
-------------------------------------------------------------
2002 2001 2000
-------- -------- --------
(IN THOUSANDS)
Income (Loss) From Operations:
United States $(2,887) $(2,930) $(1,245)
United Kingdom - (559) (513)
Latin America (94) 93 3,561
Middle East (194) (286) (452)
Corporate (1) (1) (322)
-------- -------- --------
Total income (loss) from operations $(3,176) $ 3,683 $ 1,029
======== ======== ========
Interest Expense:
Latin America $ - $ - $ 15
Corporate 42 839 1,003
-------- -------- --------
Total interest expense $ 42 $ 839 $ 1,018
======== ======== ========
Benefit (Provision) For Income
Taxes:
United States $ 79 $ (247) $ -
United Kingdom - - 70
Latin America - (289) (1,187)
-------- -------- --------
Total benefit (provision) for income
taxes $ 79 $ (536) $(1,117)
======== ======== ========
Number of Customers:
United States 1 1 1
United Kingdom - - 1
Latin America 1 3 4
-------- -------- --------
2 4 6
======== ======== ========
2002 2001
------ -------
(IN THOUSANDS)
Assets:
United States $3,400 $ 4,515
United Kingdom - 826
Latin America 228 1,226
Middle East 3,397 3,419
Corporate 54 410
------ -------
Total assets $7,079 $10,396
====== =======
Long Lived Assets:
United States $3,320 $ 4,083
United Kingdom - 677
Latin America 2 3
Middle East 3,390 3,390
------ -------
Total long lived assets $6,712 $ 8,153
====== =======
F - 25
ENVIRONMENTAL SAFEGUARDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
__________
13. SEGMENT, GEOGRAPHIC AND MAJOR CUSTOMER INFORMATION, CONTINUED
-------------------------------------------------------------
2002 2001
----- -------
(IN THOUSANDS)
Capital Expenditures:
United States $ 185 $ 260
----- -------
Total capital expenditures $ 185 $ 260
===== =======
During the years ended December 31, 2002, 2001 and 2000, the Company's
largest customer accounted for 95%, 93% and 50% of revenue, respectively.
14. SUBSEQUENT EVENTS
-----------------
In January 2003 the Company signed a contract to process various waste
streams at a facility in Arkansas.
On March 20, 2003, the Company completed a $1,500,000 loan agreement (the
"Loan Agreement") with a private investor group. The Loan is to be funded
in three $500,000 fundings on March 20,2003; May 15,2003; and August 15,
2003. The initial funding of March 20, 2003 has been received. The Loan
Agreement provided the creditor with a warrant to purchase 1,500,000 shares
of the Company's common stock at a price of $0.01 per share. The loan is
collateralized by three ITD units and bears interest at a stated rate of
12% per year. The effective interest rate on the loan is approximately 35%
per year. Payments are due in 20 quarterly installments of $75,000, plus
accrued interest, beginning in August 2003 with a final payment due in May
2008.
Also during March 2003, the Company negotiated an extension of the maturity
date of $250,000 of un-collateralized related party notes payable to
September 16, 2003. (See Note 4)
15. NON-CASH INVESTING AND FINANCING ACTIVITIES
-------------------------------------------
The Company engaged in certain non-cash investing and financing activities
as follows:
2002 2001 2000
----- ----- -------
(IN THOUSANDS)
Dividends declared but not yet paid. $ 253 $ 338 $ -
Stock warrants issued to extend the due
date of senior secured notes payable. - 46 438
Series D convertible preferred stock
exchanged for Series C non-convertible
preferred stock. - - 168
Property and equipment for settlement of
accounts receivable - - 65
F - 26